Question $7$

$2\mathrm{.}5$ pts

Assume the AA $-$ DD equilibrium model under the floating exchange rate regime. How will the monetary policy impact the equilibrium? Select one $-$ the most appropriate answer.

Decrease in money supply will boost output and increase domestic interest rate bringing about domestic currency appreciation. Central bank will have to restore the previous level of exchange rate via buying foreign assets.

Increase in money supply will boost output and decrease domestic interest rate bringing about domestic currency depreciation. New equilibrium will be set.

No correct answer.

Increase in money supply will boost output and increase domestic interest rate bringing about domestic currency appreciation. New equilibrium will be set.

Decrease in money supply will boost output and increase domestic interest rate bringing about domestic currency appreciation. New equilibrium will be set.