Starting from a position where a country's money demand equals the money supply and its balance of payments is in equilibrium.According to the monetary approach,an expansionary monetary policy will lead to an ______ of the home currency under flexible exchange rate regime; whereas it will cause trade _______ under fixed exchange rate.
A) depreciation; deficit
B) depreciation; surplus
C) appreciation; deficit
D) appreciation; surplus

Question

Quizplus · Accepted Answer

Under a flexible exchange rate regime, an expansionary monetary policy increases the money supply, leading to lower interest rates. This makes domestic assets less attractive, causing capital outflows and depreciation of the home currency. Under a fixed exchange rate, the increased money supply leads to more spending on imports than exports, causing a trade deficit.

Starting from a Position Where a Country's Money Demand Equals