For a country with a floating exchange rate and, initially, an overall payments balance of zero, if the country implements expansionary monetary policy, the LM curve will shift to the _____ which will lead to the country's currency to __________.
A)left; appreciate
B)left; depreciate
C)right; depreciate
D)right; appreciate

Question

Quizplus · Accepted Answer

Expansionary monetary policy will shift the LM curve to the right, increasing output and lowering interest rates. This shift will result in an increase in demand for domestic goods and services, leading to an increase in imports and a decrease in exports. As a result, the current account balance will shift to a deficit, causing the overall payments balance to become negative. In order to cover this deficit, there will be an increase in demand for foreign currency, leading to a depreciation of the domestic currency.

For a Country with a Floating Exchange Rate And, Initially