If we start from long-run general equilibrium of goods, forex, and the money markets, and there is a temporary expansion of the money supply, what will be the outcome?
A) GDP rises, the interest rate falls, and the exchange rate rises (depreciation).
B) GDP rises, the interest rate rises, and the exchange rate falls (appreciation).
C) GDP falls, the interest rate falls, and the exchange rate rises (depreciation).
D) GDP falls, the interest rate rises, and the exchange rate rises (depreciation).

Question

Quizplus · Accepted Answer

In the short run, an expansion of the money supply lowers interest rates, which stimulates investment and increases GDP. Lower interest rates also lead to a depreciation of the exchange rate as capital flows out in search of higher returns elsewhere.

If We Start from Long-Run General Equilibrium of Goods, Forex