As part of the "exchange rate effect of monetary policy," a higher money supply causes __________ of the domestic currency and thus __________ net exports.
A) appreciation; rising
B) appreciation; falling
C) depreciation; rising
D) depreciation; falling

Question

Quizplus · Accepted Answer

A higher money supply leads to a depreciation of the domestic currency because with more supply of the currency, its value in the market decreases. This, in turn, makes exports less expensive and imports more expensive, causing an increase in net exports. Therefore, the correct option is depreciation; rising net exports.

As Part of the "Exchange Rate Effect of Monetary Policy