An expansion of the domestic money supply

Question

Quizplus · Accepted Answer

An expansion of the domestic money supply will lead to an increase in aggregate demand and upward pressure on domestic prices under a flexible rate system. This is because as there is more money in circulation, consumers and firms will have more purchasing power which will increase the demand for goods and services, leading to an increase in prices. However, under a fixed rate system, an expansion of the domestic money supply will lead to an inflow of short-term capital as investors take advantage of higher domestic interest rates, rather than an increase in aggregate demand.

An Expansion of the Domestic Money Supply