If the Fed introduces an expansionary monetary policy:
I. real interest rates fall.
II. the U.S. dollar appreciates.
III. the U.S. exports increase relative to imports.
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A. B. C. D.D
When the Fed introduces an expansionary monetary policy, the money supply increases, causing the real interest rate to fall. This leads to a flow of funds out of the U.S. and into economies with higher real rates. The decreased demand for the U.S. dollar causes it to depreciate. This, in turn, makes the U.S. goods cheaper relative to foreign goods, increasing the U.S. exports and decreasing its imports. Note that this offsetting increase in the demand for U.S. dollar works more slowly than the initial depreciation caused by the outflow of monetary funds.