Assume Floating Exchange Rates

question 7

Multiple Choice

Assume floating exchange rates.Suppose there are a 5% growth in U.S output and the Fed increases in U.S.money supply by 5%.Then,which of the following will offset these changes?

• A) 10% increase in exchange rate.
• B) 10% decrease in exchange rate.
• C) 10% increase in the foreign inflation.
• D) The two changes offset each other.