Under a floating exchage rate regime, following an expalsion in the money supply

Question

Under a floating exchage rate regime, following an expalsion in the money supply, the change in the value of doemstic currency is most likely to:
A. Incrase demand for imports
B. Initiate foreign capital inflow
C. Lower real product
D. Incrase demand for exports

Under a floating exchange rate regime, with a contraction in the money supply, which of the following is likely to happen in the short-run?
A. Rise in domestic price level
B. Increase in the country's holdings of official internaitonal reserves
C. Inflow of foreign captial
D. Deficit in the financial account

Explanation / Answer

1> D. Increase demand for exports

Reason

Due to depreciation, the goods in that country will cost lesser in the foreign country.

2>D. Deficit in the financial account

Reason

The deficit will occur due to the decreases in the value of that currency.

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