An increase in the money supply affects net exports because the foreign exchange rate _____, which makes imports _____ to citizens of the country and makes exports _____ to foreign buyers.
A) rises; more expensive; cheaper
B) falls; cheaper; more expensive
C) rises; cheaper; more expensive
D) falls; more expensive; cheaper

Question

Quizplus · Accepted Answer

An increase in the money supply typically leads to a depreciation of the domestic currency (the foreign exchange rate falls), which makes imports more expensive for citizens of the country and exports cheaper for foreign buyers. This is because a weaker domestic currency means that more of it is needed to buy the same amount of foreign currency, increasing the local currency price of imports, and conversely, making exports cost less in foreign currency terms.

An Increase in the Money Supply Affects Net Exports Because