Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States.Other things equal, under a floating exchange rate system, the dollar will likely
A) appreciate in value relative to other currencies.
B) depreciate in value relative to other currencies.
C) be officially devalued by the government.
D) neither appreciate nor depreciate.

Question

Quizplus · Accepted Answer

An increase in the money supply in the United States would lead to a higher supply of dollars in the foreign exchange market. This would lead to a decrease in the value of the dollar relative to other currencies, i.e. a depreciation of the dollar.

Given an Initial Equilibrium in the Money Market and Foreign