According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money
A)gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
B)gains value in terms of the domestic goods and services it can buy, but loses value in terms of the foreign currency it can buy.
C)loses value in terms of the domestic goods and services it can buy, but gains value in terms of the foreign currency it can buy.
D)loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

Question

Quizplus · Accepted Answer

When a country's central bank decreases the money supply, it typically leads to an increase in the value of the currency. This is because there is less currency available, making each unit of currency more valuable. According to purchasing-power parity, this increase in value should be reflected both in terms of the domestic goods and services a unit of money can buy (due to decreased inflation or deflation) and in terms of the foreign currency it can buy (as the currency strengthens against others).

According to Purchasing-Power Parity, When a Country's Central Bank Decreases