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

Show Answers

An increase in both the demand for imports and the demand for foreign currencyA rise in the demand for imports but a reduction in the demand for foreign currencyA decline in the demand for imports accompanied by a higher demand for foreign currencyA decrease in both the demand for imports and the need for foreign currencyNo change in the demand for imports or foreign currency

Explanation

When income in the United States increases under a floating exchange rate system, consumers typically purchase more imported goods, which raises the demand for imports. To pay for these imports, there is a greater need for foreign currency, leading to an increase in its demand as well.