Difficulty: Easy

Average Score: 100%

U.S. central bank increases money supply Ãƒ¢Ã¢€ ' interest rates Ãƒ¢Ã¢€ '

Rationale

U.S. central bank increases money supply, leading to a decrease in interest rates, which causes the dollar to depreciate.

When the central bank increases the money supply, it typically lowers interest rates. Lower interest rates make borrowing cheaper, which can lead to increased spending and investment. This increased supply of money often results in a depreciation of the dollar as more money circulates in the economy.

A (Ãƒ¢Ã¢€ ‘ demand for $, dollar appreciates) CORRECT

This choice incorrectly suggests that an increase in money supply would lead to an appreciation of the dollar due to increased demand. However, when the money supply increases, it generally results in lower interest rates, which does not stimulate demand in this manner; instead, it tends to lead to a depreciation of the dollar.

B (Ãƒ¢Ã¢€ ‘ supply of $, dollar appreciates) YOUR ANSWER

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.

C (Ãƒ¢Ã¢€ “ supply of $, dollar depreciates) YOUR ANSWER

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.

D (Ãƒ¢Ã¢€ “ demand for $, dollar depreciates) YOUR ANSWER

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.

Conclusion

An increase in the money supply by the U.S. central bank typically results in lower interest rates, which can stimulate borrowing and spending. This oversupply of dollars leads to a depreciation of the dollar's value. Thus, the relationship between money supply and interest rates is key to understanding currency valuation, as it drives the underlying economic mechanisms that influence demand and supply dynamics.

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