In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause
A)an increase in output.
B)an increase in exports.
C)a reduction in the exchange rate, E.
D)all of the above
E) only A and C

Question

Quizplus · Accepted Answer

Expansionary monetary policy increases the money supply, which leads to a decrease in interest rates. Lower interest rates make domestic assets less attractive, causing investors to sell domestic assets and buy foreign assets. This increases the demand for foreign currency and decreases the demand for domestic currency, leading to a depreciation of the exchange rate. The depreciation of the exchange rate makes domestic goods cheaper relative to foreign goods, increasing exports and output.

In an Open Economy Under Flexible Exchange Rates,expansionary Monetary Policy