Explain how changes in relative income affect the value of a nation’s currency.

What will be an ideal response?

If a foreign nation’s income rises more rapidly than other nations’ incomes, then its expenditures on imports are likely to grow along with expenditures on everything else. This will probably cause the currency to depreciate as other nations are not growing as rapidly, and therefore, their demand for the nation’s currency is not keeping pace with the change in supply. The reverse would be true if the nation’s income grew more slowly than other nations’ incomes.