Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve decreases the money supply of the United States.Under a floating exchange rate system,the dollar would:
A) Appreciate in value relative to other currencies
B) Depreciate in value relative to other currencies
C) Be officially devalued by the government
D) Be officially revalued by the government

Question

Quizplus · Accepted Answer

A decrease in the money supply leads to higher interest rates, attracting foreign capital and causing the dollar to appreciate.

Given an Initial Equilibrium in the Money Market and Foreign