Question

11. Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, and all else is equal, then the exchange rate should: (a) depreciate. (b) hold steady. (c) appreciate. (d) appreciate and then remain steady.

Answer 1

A) depreciate

Step-by-step explanation:

The monetary approach to determining exchange rates states that the exchange rate is a function of the total demand and supply of national currency in each country. The demand for money depends on real income and the inflation rate.

So an increase in the money supply, will result in an increase in the country's inflation rate. An increase in inflation results in a decrease of the currency's exchange rate.