Suppose that, for a country, its money supply (M^s) is at the moment equal to its demand for money (M^d). Now suppose that the country's central bank pumps new money into the economy. The result of this central bank action, other things equal, is that there will be __________ under flexible exchange rates and a consequent __________ of the country's currency. A) an incipient balance-of-payments surplus for the country; appreciation B) an incipient balance-of-payments surplus for the country; depreciation C) an incipient balance-of-payments deficit for the country; appreciation D) an incipient balance-of-payments deficit for the country; depreciation

Question

Quizplus · Accepted Answer

An increase in the money supply will lead to an increased demand for goods and services, which will cause inflation. As a result, imports will be cheaper than domestic goods, leading to an increase in imports and a decrease in exports. This will result in a balance-of-payments deficit and a depreciation of the country's currency.

Suppose That, for a Country, Its Money Supply (Ms) Is

Suppose That, for a Country, Its Money Supply (M^s) Is