With flexible exchange rates,a decrease in money supply by a central bank causes the domestic interest rate to _______ ,official settlements _______,and the domestic currency to _______.As a result,the IS curve will shift to bring the domestic interest rate to be equal to foreign interest rates.
A) fall; deficit; depreciate
B) rise; deficit; depreciate
C) rise; surplus; appreciate
D) fall; surplus; appreciate

Question

Quizplus · Accepted Answer

A decrease in the money supply by a central bank causes the domestic interest rate to rise, leading to a capital inflow (or reduced capital outflow), which results in an official settlements surplus. The higher interest rate makes the domestic currency more attractive, causing it to appreciate. This appreciation, in turn, affects the IS curve by shifting it to adjust the domestic interest rate towards equilibrium with foreign interest rates.

With Flexible Exchange Rates,a Decrease in Money Supply by a Central