As part of the "exchange rate effect of monetary policy," a lower 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

A lower money supply typically leads to higher interest rates as there is less money available for borrowing. Higher interest rates attract foreign investors looking for a higher return on their investments, which increases demand for the domestic currency, leading to its appreciation.

As Part of the "Exchange Rate Effect of Monetary Policy