Question

[5 pts] Suppose the US and China are large economies. What happens to China’s output when the US permanently increases its money supply? Explain your answer.

Answer 1

when the US would increase its money supply then the purchasing power of the currency would decrease and thus there would be inflation in the economy and the prices of goods and services would increase.

• due to inflation in the economy of US the prices of goods and services produced by US would increase and therefore the import for china would be costly.China would try to be self sufficient to produce such goods which could be used as the substitution of the imported goods and services.
• due to increased rate of goods and services,demand for foreign goods which are cheaper would increase and thus China can get benefit of producing such products which can be exported to US and foreign currency can be earned.

mentioned both the scenarios the output of the China would increase.