An unexpected increase in the U.S.money supply leads to:
A)an immediate reduction in the U.S.interest rate
B)an immediate larger dollar depreciation
C)a gradual appreciation of the dollar over time
D)all of the above

Question

Quizplus · Accepted Answer

An unexpected increase in the U.S. money supply leads to all of the above because an increase in money supply leads to an increase in liquidity in the markets, which leads to a decrease in interest rates. Reduced interest rates, in turn, make the currency less attractive to foreign investors leading to a depreciation of the dollar. Over time, as the U.S. economy recovers from the impact of the increased money supply, the demand for the dollar increases leading to a gradual appreciation of the currency.

An Unexpected Increase in the U