In a small open economy with a floating exchange rate, the exchange rate will appreciate if:
A)the money supply is increased. the
B)money supply is decreased.
C)government spending is decreased.
D)taxes are decreased.

Question

Quizplus · Accepted Answer

In a small open economy with a floating exchange rate, an increase in the money supply would lead to a depreciation of the exchange rate as the increase in the supply of the domestic currency would make it less valuable relative to foreign currencies. Conversely, a decrease in the money supply would lead to an appreciation of the exchange rate as the decrease in the supply of the domestic currency would make it more valuable relative to foreign currencies. Therefore, choice B (money supply is decreased) is the correct answer. The other choices would not have a direct impact on the exchange rate in this scenario.

In a Small Open Economy with a Floating Exchange Rate