Which of the following does NOT occur when a country with floating exchange rates increases the money supply?
A)Interest rates fall causing capital outflows in the short run.
B)Interest rates initially increases causing real spending, production, and income to fall.
C)The current account will initially tend to worsen as a result of the decrease in interest rates.
D)Aggregate demand will increase which will lead to an increase in the price level.

Question

Quizplus · Accepted Answer

When a country with floating exchange rates increases the money supply, interest rates typically fall, not increase. This decrease in interest rates can lead to capital outflows in the short run, potentially worsen the current account due to increased imports or decreased exports, and increase aggregate demand, which may lead to higher price levels. An initial increase in interest rates would not be a typical direct result of increasing the money supply.

Which of the Following Does NOT Occur When a Country