Foreign Quantitative Easing and Exchange Rates
A foreign central bank initiates quantitative easing, increasing the supply of its own currency. How does this indirectly affect the FX market for the domestic currency shown above?
A
The domestic currency depreciates owing to a rightward shift in the supply of foreign currency.
B
The domestic currency depreciates because the increased foreign currency supply shifts the demand curve for foreign currency rightward.
C
The domestic currency appreciates, as the relative scarcity of foreign currency leads to a leftward shift in its supply, lowering the exchange rate.
D
There is no effect on the domestic currency, as foreign QE only impacts the foreign side of the FX market.
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