Question

4. Indicate which of the following circumstances will cause an increase in the money supply: [5p] i. A sale of bonds by the central bank. ii An increase in the reserve-deposit ratio. iii. A shift in public preferences against holding cash and in favor of holding deposits. iv. An increase in the foreign interest rate in a fixed exchange rate regime. v. The four cited circumstances. (justify your answer)

PLEASE JUSTIFY THE ANSWER CLEARLY

Answer 1

Option 4

With the increase in foreign interest rates compared to domestic rates, the demand for domestic decreases which reduces foreign investment and decreases the currency's relative value. The reduction in value of currency, the availability of currency is easier which causes the money supply to increase.