Question

1. According to the real exchange rate approach, an increase in the money supply (will/will not) affect the real exchange rate.

Answer 1

If the money supply increases then the purchasing power increases and so demand is increases and if the demand is increases then the price is also increases due to this inflation occur.

If the inflation in the market then the domestic goods are less competitive in the market and so export will decreases and therefore there is a less demand for the currency and its value will tends to fall.

So increase in the money supply could lead to a depriciation in the exchange rate.