When an Increase in the Quantity of Money Is Considered

question 27

Multiple Choice

When an increase in the quantity of money is considered to be permanent and prices are sticky, then in the short run the exchange rate depreciates and overshoots because:

• A) domestic nominal returns fall relative to foreign returns, and traders expect a permanent depreciation in future exchange rates.
• B) traders do not change their expectations of the exchange rate, and lower domestic rates make it easier to borrow.
• C) inflationary expectations eventually cause a rise in domestic real returns.
• D) traders quickly realize that their expectations of future exchange rates are incorrect and eventually prices will become unstuck.

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Definitions:

Incomes

refers to the earnings that individuals or businesses receive, typically through work, investments, or other sources.

Changing Technology

The ongoing evolution and innovation in technology that impacts how goods and services are produced, consumed, and delivered.

Employment

The condition of having a job or being employed in a paid position.

Wage Rates

The amount of money paid to a worker per unit of time, such as hourly, daily, or monthly, often subject to negotiations between employers and employees or unions.