Under a floating exchange rate regime, the domestic currency will normally depreciate if the money supply:
A)contracts.
B)expands.
C)does not change with the change in the exchange rates.
D)is managed to keep the country's inflation rate steady.

Question

Quizplus · Accepted Answer

Under a floating exchange rate regime, the exchange rate is determined by market forces of supply and demand. When the money supply expands, it leads to an increase in the supply of the domestic currency in the foreign exchange market. This increase in supply will lead to a decrease in the exchange rate of the domestic currency relative to other currencies, which means that the domestic currency will depreciate.

Under a Floating Exchange Rate Regime, the Domestic Currency Will