If there is a permanent increase of 8% in the domestic money supply, then which of the following will be true in the long run?
A) Prices will decrease by 8%.
B) Prices will increase by 4%.
C) The home country currency will depreciate by 8%.
D) The home country currency will appreciate by 4%.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money and the Fisher Effect, a permanent increase in the money supply is likely to lead to a proportional increase in the price level in the long run, assuming velocity of money and real output remain constant. This increase in the domestic price level makes domestic goods more expensive relative to foreign goods, leading to a depreciation of the home country currency. Therefore, if the domestic money supply increases by 8%, it is expected that the home country currency will depreciate by approximately 8% in the long run, making option C correct.

If There Is a Permanent Increase of 8% in the Domestic