Which of the following is likely to occur if the United States enacts an expansionary monetary policy under flexible exchange rates?
A)Interest rates will increase.
B)Inflows of capital will increase.
C)The exchange rate will depreciate.
D)Outflows of capital will decrease.

Question

Quizplus · Accepted Answer

An expansionary monetary policy involves increasing the money supply, which in turn decreases interest rates. This will lead to a decrease in the exchange rate as investors seek higher interest rates in other countries, resulting in a depreciation of the U.S. currency. Inflows of capital may increase, but this is not a guaranteed outcome. Outflows of capital may also increase if investors perceive more attractive investment opportunities in other countries due to the lower interest rates. Therefore, choice C is the most likely outcome.

Which of the Following Is Likely to Occur If the United