If there is a temporary increase in the money supply in the Eurozone, ceteris paribus, what is the result for the United States?
A) The money supply in the United States must decrease by the same proportion.
B) The U.S. dollar nominal interest rate will increase, as the euro rate is unchanged.
C) Long-run expectations shift to expect a stronger euro.
D) The dollar appreciates against the euro.

Question

Quizplus · Accepted Answer

With a temporary increase in the money supply in the Eurozone, the euro will depreciate relative to the US dollar. Thus, the dollar will appreciate against the euro. This means that US exports to Europe become more expensive, but imports from Europe become cheaper, potentially increasing US imports from the Eurozone.

If There Is a Temporary Increase in the Money Supply