Chapter 43, Problem 1MCQ

To determine

The correct option for an increase in the supply of a currency with a floating exchange rate.

Answer to Problem 1MCQ

Option d is correct.

Explanation of Solution

Explanation for the correct option:

d

The government buys more of the currency. Buying more currency will lead to an increase in the supply of a currency with a floating exchange rate. Therefore, option d is correct.

Explanation for incorrect options:

a.

Increase in the supply of a currency with a floating exchange rate will decrease the demand for the currency.

b.

Appreciation of the currency is caused by a decrease in the supply of a currency with a floating exchange rate. c.

Depreciation of the currency in a floating exchange rate regime will not the supply to rise.

e.

Decrease in government buying will decrease the supply.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.