Money Velocity and Currency Value

Question

According to the quantity theory of money, an increase in the velocity of money, with the money supply held constant, leads to higher price levels. What is the most likely impact on the foreign exchange market based on the graph above?

Accepted Answer

A leftward shift in the demand for domestic currency, resulting in depreciation due to reduced real returns.

Answer

A rightward shift in the demand for domestic currency, causing an appreciation due to improved purchasing power.

Answer

No change in the market because velocity only affects inflation and not exchange rates.

Answer

A rightward shift in the supply of domestic currency, leading to depreciation through increased currency availability.