If the central bank increases the money supply, then the nominal interest rate will ____ and...

If the central bank increases the money supply, then the nominal interest rate will ____ and the exchange rate will ____.

A

rise; appreciate

B

rise; depreciate

C

fall; appreciate

D

fall; depreciate

Expert Solution

IS curve represnts the negative relationship between the interest rate and quantity . It is downward sloping

LM curve represents the positive relation between interest rate and quantity . It is upward sloping. Intersection of both the curve represents the equilibrium . So if the central bank increase the moeny supply . This will shift the LM curve rightwards which lead to fall in the interest rate and rise in quantity .

Now Lower interest rates will also tend to reduce the value of the currency. If UK interest rates fall relative to elsewhere, it becomes less attractive to save money in UK banks. We will see an outflow of ‘hot money’ as investors move to countries with higher interest rates. This will put downward pressure on the currency as people sell Pounds to buy other currency. Hence currency will depreciate .

Hence ( D ) part is a correct answer

Rahul Sunny answered 2 years ago

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