Answer (C) is correct . Citizens with higher incomes look for new consumption opportunities in other countries, driving up the demand for those currencies and shifting the demand curve to the right. Thus, as incomes rise in one country, the prices of foreign currencies rise as well, and the local currency will depreciate.
Answer (A) is incorrect because If incomes in Country 1 rise, its currency will tend to depreciate relative to the currencies of other countries.
Answer (B) is incorrect because If incomes in Country 1 fall, its currency will tend to appreciate relative to the currencies of other countries.
Answer (D) is incorrect because If incomes in Country?1 remain constant, its currency will not tend to appreciate or depreciate relative to the currencies of other countries.
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