Assume perfect capital mobility and floating exchange rates.Then,if the central bank increases money supply,the domestic currency will _______ and cause the IS curve to ________.
A) Appreciate, shift to the right
B) Appreciate, shift to the left
C) Depreciate, shift to the right
D) Depreciate, shift to the left

Question

Quizplus · Accepted Answer

Increasing the money supply typically leads to depreciation of the domestic currency due to lower interest rates attracting less foreign capital. This depreciation makes domestic goods cheaper for foreigners and foreign goods more expensive for domestic consumers, increasing exports and reducing imports, which shifts the IS curve to the right as aggregate demand increases.

Assume Perfect Capital Mobility and Floating Exchange Rates