Under a flexible exchange rate,an increase in the domestic money supply leads to
A) a devaluation of the domestic currency.
B) a revaluation of the domestic currency.
C) a depreciation of the domestic currency.
D) an appreciation of the domestic currency.

Question

Quizplus · Accepted Answer

An increase in the domestic money supply leads to an increase in the supply of domestic currency in the foreign exchange market. This excess supply of currency leads to a decrease in its value relative to other currencies, which is known as currency depreciation. Therefore, option C is correct.

Under a Flexible Exchange Rate,an Increase in the Domestic Money