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According to the asset approach to exchange rates, if the US has a floating exchange rate...

According to the asset approach to exchange rates, if the US has a floating exchange rate regime and the Feds decreases the money supply temporarily, the short-run effect will be to make The US interest rates ____ and the value of the US currency ____.

a) rise, appreciate

b) fall, depreciate

c) fall, appreciate

d) rise, depreciate

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Answer #1

The answer to this question is "A", Rise and Appreciate.

As per the asset approach if the Fed temporarily decreases the money supply in the market. It will increase the interest rates and that increased interest rates will attract the investors around the world who will demand more of US dollar to invest in the US market. This will appreciate the value of the US Dolar. This will continue to the point where increased money supply form the international market will decrease the interest rates again.

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