Consider the short-run effect of a decrease in US money demand on interest rates and exchange...

Consider the short-run effect of a decrease in US money demand on interest rates and exchange rates

Expert Solution

Demand and supply for a currency determines its value. When the demand for a currency increases, the value of the currency increases. And, as the demand for a currency decreases, the value of the currency decreases.

A decrease in US money demand leads to increase in money supply and thereby depreciation of the currency.

An increase in the money supply the supply of money will be plenty. This will make borrowing cheaper and lower the domestic interest rate in the short run.

Similarly an increase in money supply affect exchange rate also. It will causes depreciation of the currency.

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