As part of the "exchange rate channel of monetary policy," a higher money supply causes a __________ interest rate and thus __________ of the domestic currency.
A) higher; appreciation
B) higher; depreciation
C) lower; appreciation
D) lower; depreciation

Question

Quizplus · Accepted Answer

According to the exchange rate channel of monetary policy, a higher money supply causes a lower interest rate. This lower interest rate makes investing in the domestic currency less attractive, leading to a depreciation of the domestic currency. Therefore, the correct answer is D) lower; depreciation.

As Part of the "Exchange Rate Channel of Monetary Policy