Exchange Rate and Income Relationship

The Impact of Rising Income on Exchange Rates

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Question

The exchange rate of a country's currency will ________ if the income of the country and its trading partners rises.

Answers

A. neither of these answers

B. increase

C. This answer depends on which income rises the fastest: for countries that are similar in size and propensity to import, the country that is growing the fastest will increase its demand for imports relatively more than its trading partner, resulting in a decrease in the value of the more rapidly growing nation's currency.

D. decrease

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Explanations

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A. B. C. D.

Fore countries are similar in size and propensity to import, the country that is growing the fastest will increase its demand for imports relatively more than its trading partner, resulting in a decrease in the value of the more rapidly growing nation's currency. Sluggish growth of income relative to one's trading partners tends to cause the slow-growth nation's currency to appreciate.

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