Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus,, then the exchange rate should: A) depreciate. B) hold steady. C) appreciate. D) appreciate and then remain steady.

Question

Quizplus · Accepted Answer

According to the monetary approach to exchange rates, an increase in a country's money supply will lead to an increase in the demand for goods and services which, in turn, will increase the demand for that country's currency. This increased demand for the currency will cause an appreciation in the exchange rate, making foreign goods and services cheaper and domestic goods and services more expensive. Therefore, the exchange rate should depreciate when there is a rise in a country's home money supply.

Under the Monetary Approach to Exchange Rates, If There Is