When the Fed unexpectedly increases the money supply,
A)real interest rates will rise and the foreign exchange value of the dollar will appreciate.
B)real interest rates will rise and the foreign exchange value of the dollar will depreciate.
C)real interest rates will fall and the foreign exchange value of the dollar will appreciate.
D)real interest rates will fall and the foreign exchange value of the dollar will depreciate.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly increases the money supply, the supply of money available for lending increases, leading to a decrease in interest rates. This decrease in interest rates will lead to a decrease in the foreign exchange value of the dollar as investors seek higher returns elsewhere. Therefore, real interest rates will fall and the foreign exchange value of the dollar will depreciate.

When the Fed Unexpectedly Increases the Money Supply