If a country with floating exchange rates uses an expansionary monetary policy:

Question

If a country with floating exchange rates uses an expansionary monetary policy:

the domestic interest rate falls, investment spending decreases,the effect on the exchange rate and net imports is ambiguous, and GDP falls

the domestic interest rate increases, investment spending decreases, the exchange rate increases, imports increase while exports fall, and GDP falls.

the domestic interest rate falls, investment spending increases, the exchange rate decreases, exports increase while imports fall, and GDP increases.

the domestic interest rate falls, investment spending increases, the exchange rate increases, imports increase while exports fall, and the effect on GDP is ambiguous.

Explanation / Answer

C) the domestic interest rate falls, investment spending increases, the exchange rate decreases, exports increase while imports fall, and GDP increases.

Expansionary monetary policy increases the money supply in the economy which resulted in the decrease in interest rate. Decrease in interest rate increases the investment spending as borrowing cost decreases. Decrease in interest rate decreases the demand of domestic currency so exchange rate falls. Fall in exchange rate leads to depreciation of home currency while leads to increase in exports while decrease in imports.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.