Two countries have flexible exchange rate systems and an active trading relationship. If incomes in Country 1, everything else being equal, then the currency of Country 1 will tend to relative to the currency of Country 2.

List A

List B

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.