Consider the monetary transmission mechanism in an open economy.Other things being equal,an increase in the domestic money supply leads to

Question

Quizplus · Accepted Answer

An increase in the domestic money supply leads to a depreciation of the domestic currency, making exports relatively cheaper and imports relatively expensive. This stimulates net exports and raises aggregate demand. Choice A is incorrect because an appreciation of the domestic currency inhibits net exports, making exports relatively more expensive and imports relatively cheaper, thereby reducing aggregate demand. Choice B is incorrect because a depreciation of the domestic currency also inhibits net exports, making imports relatively more expensive and exports relatively cheaper, which reduces aggregate demand. Choice D is incorrect because an appreciation of the domestic currency stimulates net exports but inhibits aggregate demand since it makes exports relatively more expensive and imports relatively cheaper, thereby reducing domestic production and output. Choice E is incorrect because an appreciation of the domestic currency stimulates net exports but reduces aggregate demand by making exports relatively more expensive and imports relatively cheaper, thereby reducing domestic production and output.

Consider the Monetary Transmission Mechanism in an Open Economy