People in the Bahamas use both Bahamian dollars and U.S.dollars to pay for goods and services.Suppose that the Fed increases money supply,causing higher inflation rate in the U.S.If the exchange rate were allowed to float,the U.S.dollar will ________ against the Bahamian dollar and Bahamians will substitute toward more __________ holding.
A) appreciate; Bahamian dollars
B) appreciate; U.S. dollars
C) depreciate; Bahamian dollars
D) depreciate; U.S. dollars

Question

Quizplus · Accepted Answer

If the Fed increases money supply and causes higher inflation rate in the U.S., the U.S. dollar will depreciate against the Bahamian dollar. In this case, Bahamians will likely substitute toward holding more Bahamian dollars, as the U.S. dollar will be worth less relative to the Bahamian dollar. Therefore, the correct choice is (C) depreciate; Bahamian dollars.

People in the Bahamas Use Both Bahamian Dollars and U