When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the foreign money supply has:
A) temporarily risen.
B) permanently risen.
C) temporarily fallen.
D) permanently fallen.

Question

Quizplus · Accepted Answer

An appreciation in the exchange rate means that domestic currency has temporarily become more valuable relative to foreign currency. This can happen if the foreign money supply increases, causing people to buy more of the domestic currency to purchase goods and services from that country. However, in the long run, this increase in the money supply will likely lead to inflation, causing the exchange rate to depreciate back to its original level. Therefore, the foreign money supply has temporarily risen in the short run.

When the Exchange Rate Appreciates in the Short Run and Then