Assume floating exchange rates.Suppose there are a 5% growth in U.S output and the Fed increases in U.S.money supply by 5%.Then,which of the following will offset these changes?
A) 10% increase in exchange rate.
B) 10% decrease in exchange rate.
C) 10% increase in the foreign inflation.
D) The two changes offset each other.

Question

Quizplus · Accepted Answer

The 5% growth in U.S. output and the 5% increase in U.S. money supply are likely to offset each other in terms of their impact on the exchange rate, assuming other factors remain constant.

Assume Floating Exchange Rates