Suppose the Fed decides to restrict the rate of growth of the money supply in the United States. You should expect to see
A) an initial increase in the value of the dollar that is diminished somewhat over the long run.
B) an initial increase in the value of the dollar that is swamped by a second- round depreciation.
C) an initial increase in the value of the dollar that continues until the Fed changes policy again.
D) an initial decline in the value of the dollar that is offset somewhat over the long run.
E) an initial decline in the value of the dollar that continues until the Fed changes policy again.

Question

Quizplus · Accepted Answer

Restricting the growth of the money supply typically leads to higher interest rates, which attract foreign capital and increase the value of the dollar. Over the long run, the impact may diminish as other factors come into play, but the initial increase in value is expected to persist unless the policy changes.

Suppose the Fed Decides to Restrict the Rate of Growth