In a floating exchange rate system, what effect would a decline in income in the United States have on the demand for imports and foreign currency?

Show Answers

A rise in the demand for imports along with a higher demand for foreign currencyAn increase in import demand accompanied by a reduced demand for foreign currencyA reduction in import demand but an increased demand for foreign currencyA drop in both import demand and the need for foreign currency

Explanation

When income in the United States falls under a floating exchange rate system, consumers and businesses typically reduce their spending on imported goods. This leads to a lower demand for imports and consequently less demand for foreign currency to pay for those imports.