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In a monetary model with floating exchange rates, what will happen to exchange rate, if the...

In a monetary model with floating exchange rates, what will happen to exchange rate, if the Central Bank of Turkey has decided to increase money supply? Discuss.

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If the Central Bank of Turkey has decided to increase the money supply, then the interest rates in Turkey would fall below the world interest rate. This would lead to a massive capital outflow from Turkey, so the Net Capital Outflow of Turkey would Increase.

Increase in the new capital Outflow of Turkey would lead to the depreciation of the Turkey's currency since there is floating exchange rate regime. Therefore, the exchange rate(defined as the price of foreign currency in terms of Domestic Currency) will increase.

Hence, if the Central Bank of Turkey has decided to increase money supply it will lead to an increase of Exchange Rate of Turkey.

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