In an open economy the demand for money Select one: a. increases because foreigners hold money...

In an open economy the demand for money

Select one:

a. increases because foreigners hold money to buy domestic assets.

b. decreases because foreigners hold domestic currency in their countries.

c. is no different than in a closed economy.

d. doesn't change unless the world interest rate changes.

Expert Solution

In an open economy capital is free to move from rest of the world to domestic and from domestic to the rest of the world. The demand for money arises for purchasing the domestic assests and goods and services. So in an open economy when foreigners wants to purchase doemstic assests or goods and services, they need to convert their currency into domestic currency, therefore the demand for domestic currency increases.

Hence it can be said that in an open economy the demand for money increases because foreigners hold money to buy domestic assets.

Hence option a is the correct answer.

Rahul Sunny answered 2 years ago

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