In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?
A)an appreciation of the domestic currency
B)a reduction in the exchange rate, E
C)a reduction in net exports
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

A reduction in consumer confidence leading to decreased consumption can cause an appreciation of the domestic currency. This is because lower consumption can lead to a decrease in imports, improving the current account balance and increasing demand for the domestic currency.

In an Open Economy Under Flexible Exchange Rates,a Reduction in Consumer