If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would:
A) become stronger.
B) appreciate in the short run, but not in the long run.
C) depreciate.
D) depreciate in the short run, but not in the long run.

Question

Quizplus · Accepted Answer

In the monetary model of exchange rates, an increase in U.S. real income would lead to higher demand for money. If the money supply does not change, this would lead to higher interest rates, attracting foreign capital and causing the dollar to appreciate. However, if the money supply adjusts to the increased demand, the exchange rate may not change significantly. In the context of the options given, the model suggests that the dollar would depreciate as the increased income leads to higher imports, increasing the supply of dollars in the foreign exchange market.

If US Real Income Increases, Then the Prediction of the Monetary