An increase in the European money supply would lead to a depreciation of the euro against the dollar because of the increase in supply of euros on the market, resulting in excess supply of euros and lower demand for euros. However, this would not necessarily disturb the U.S. money market equilibrium, as the increase in the money supply in Europe would not directly impact the demand for the dollar by U.S. investors. Thus, choice D is the best answer.

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Given PUS and YUS

Question 35

Multiple Choice

Given PUS and YUS

A) An increase in the European money supply causes the euro to appreciate against the dollar, but it does not disturb the U.S. money market equilibrium.
B) An increase in the European money supply causes the euro to appreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.
C) An increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.
D) An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium.
E) An increase in the European money supply causes the euro to depreciate against the dollar, and disturbing the U.S. money market equilibrium.

Correct Answer: