If the central bank expands the money supply under floating exchange rates, it potentially stimulates the economy in two ways, namely:
A) by raising the price level and by increased competition.
B) by lowering the rate of interest and by causing a depreciation of the currency.
C) by creating higher spending and by increasing the budget deficit.
D) by increasing worker productivity and creating R&D incentives for firms.

Question

Quizplus · Accepted Answer

When the central bank expands the money supply under floating exchange rates, it lowers the rate of interest, which can encourage borrowing and investment, leading to economic growth. Additionally, this can cause a depreciation of the currency, making exports cheaper and more attractive to foreign buyers, leading to increased competition and economic growth. Option A is incorrect because while expansion of the money supply can raise the price level (inflation), it does not necessarily create increased competition. Option C is incorrect because increasing the budget deficit has no direct effect on stimulating the economy. Option D is incorrect because while increased worker productivity and R&D incentives may contribute to long-term economic growth, they are not direct results of expanding the money supply.

If the Central Bank Expands the Money Supply Under Floating