The portfolio balance approach expects that as a country's debt ratios deteriorate, foreign investors will demand a higher rate of return to compensate them for the increased risk. Such a return could come from higher interest rates. It could also come from:

A. an immediate currency appreciation.
B. an immediate currency depreciation to a level to generate anticipation of gains from subsequent currency appreciation.
C. a gradual currency appreciation driven by a more accommodative monetary policy.

Correct Answer: B