Given a system of floating exchange rates and high capital mobility, other things equal an expansionary monetary policy by the Federal Reserve will cause
A) the dollar to appreciate and will decrease U.S. net exports.
B) the dollar to appreciate and will increase U.S. net exports.
C) the dollar to depreciate and will increase U.S. net exports.
D) the dollar to depreciate and will decrease U.S. net exports.

Question

Quizplus · Accepted Answer

An expansionary monetary policy by the Federal Reserve typically leads to lower interest rates, which reduces the demand for the dollar as investors seek higher returns elsewhere, causing the dollar to depreciate. A weaker dollar makes U.S. exports cheaper and imports more expensive, thus increasing net exports.

Given a System of Floating Exchange Rates and High Capital