You have just noticed that the dollar appreciated and you suspect that the American government was behind this change.Which would you choose as the most likely cause of this appreciation in the real exchange rate?

Question

Quizplus · Accepted Answer

When the money supply is decreased, the value of currency increases. This would lead to an appreciation in the real exchange rate, making imports cheaper and exports more expensive. Therefore, B is the best choice as the most likely cause of the dollar appreciation. A temporary increase in government purchases or a temporary decrease in taxes may also have an impact on the economy, but they are less likely to directly affect the exchange rate.

You Have Just Noticed That the Dollar Appreciated and You