Under a floating exchange rate regime, with a contraction in the money supply, which of the following is likely to happen in the short-run?
A)Increase in the country's holdings of official international reserves
B)Deficit in the financial account
C)Inflow of foreign capital
D)Rise in the domestic price level

Question

Quizplus · Accepted Answer

A contraction in the money supply under a floating exchange rate regime typically leads to higher interest rates, which attract foreign capital due to the higher returns on investment, resulting in an inflow of foreign capital.

Under a Floating Exchange Rate Regime, with a Contraction in the Money