money demand theory. pretty basic, but in case you forgot.

lly Metford, CFA, has just accepted a position working for the Canadian government. As an economic advisor, Metford has been asked to comment on the implications of changes in domestic currency, government policy, and inflation expectations. According to money demand theory, an increase in economic activity in Canada will most likely lead to a(n): A) decrease in demand for Canadian dollars causing a depreciation in Canadian currency. B) increase in demand for Canadian dollars causing a depreciation in Canadian currency. C) decrease in demand for Canadian dollars causing an appreciation in Canadian currency. D) increase in demand for Canadian dollars causing an appreciation in Canadian currency.

D

D) activity causes demand, which causes appreciation.

ddd

thanks for the reminder. i have to review this garbage tomorrow

d

what’s the other one, traditional model?

Traditionol Model - As the domestic currency goes down -> competitiveness in the domestic market increases -> Stock prices increase

yup it’s d… but yeah, just a reminder to touch up on this stuff… the traditional mode (j-curve?), money demand, think there is another… i haven’t hit the qbank nearly as much as i used to since i’ve been doing exams, but it’s pretty good as a brush up. Your answer: D was correct! According to money demand theory, an increase in economic activity in Canada will most likely lead to an increase in demand for Canadian dollars causing an appreciation in Canadian currency. Therefore, the money demand model explains the positive short-run correlation between exchange rate movements and stock returns.