The long-run monetary model of exchange rates provides that real income changes result in a(n) _______ change in the price level and a(n) ________ change in the strength of the currency.
A) corresponding; opposite
B) corresponding; corresponding
C) opposite; corresponding
D) opposite; opposite

Question

Quizplus · Accepted Answer

According to the long-run monetary model of exchange rates, real income changes result in an opposite change in the price level and a corresponding change in the strength of the currency. This is because an increase in real income leads to an increase in demand for goods and services, which in turn leads to an increase in prices. However, the increase in prices makes domestic goods and services relatively more expensive, which reduces demand for exports and causes the currency to appreciate in value. Conversely, a decrease in real income leads to a decrease in prices, which makes domestic goods and services relatively cheaper and increases demand for exports, causing the currency to depreciate.

The Long-Run Monetary Model of Exchange Rates Provides That Real