Other things equal, the domestic currency _____ when the domestic money supply increases relative to the foreign money supply.

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, when the domestic money supply increases relative to the foreign money supply, the domestic currency's purchasing power is reduced over time. This causes a decrease in the exchange rate of the domestic currency, which leads to depreciation in the long run.

Other Things Equal, the Domestic Currency _____ When the Domestic