You have just noticed that the dollar depreciated and you suspect that the Canadian government was behind this change.Which would you choose as the most likely cause of this depreciation in the real exchange rate?
A)an increase in the money supply
B)a decrease in the money supply
C)a temporary increase in government purchases
D)a temporary decrease in taxes

Question

Quizplus · Accepted Answer

An increase in the money supply can cause the depreciation of a currency as it increases the supply of that currency in relation to others, leading to a decrease in its value. If the Canadian government increased the money supply, it could have caused the depreciation of the US dollar. The other options may affect the domestic economy or demand for goods, but they are less likely to have a direct impact on the exchange rate.

You Have Just Noticed That the Dollar Depreciated and You