U.S. central bank increases money supply â†' interest rates â†'

This option misrepresents the relationship between money supply and currency value. While an increase in the supply of dollars typically means more money in circulation, this situation usually leads to a depreciation of the dollar rather than an appreciation, as the value of each dollar diminishes when more are available.

Although this choice correctly identifies that an increase in the supply of dollars leads to depreciation, it does not capture the broader context of how this happens through interest rate changes. The dollar depreciates primarily because the increase in money supply lowers interest rates, which affects demand dynamics.

This statement incorrectly ties depreciation of the dollar to demand factors. An increase in money supply does not directly decrease demand for dollars; instead, it generally reduces the value of the dollar itself due to the oversupply, leading to depreciation.