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Posted 3 months ago

Which of the following is most likely to cause a currency to depreciate while discouraging capital formation?

Choose 1 answer:
(A) An increase in the demand for loanable funds.
(B) An increase in the supply of loanable funds
(C) An increase in the supply of money
(D) A budget surplus
(E) A decrease in the demand for money
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Answer from Sia
Posted 3 months ago
Solution by Steps
step 1
To address the question, we need to understand the economic concepts of currency depreciation and capital formation. Currency depreciation often occurs when there is an increase in the supply of money, which can lead to inflation. Capital formation can be discouraged by factors that reduce investment, such as high inflation or low savings rates
step 2
Analyzing the answer choices in the context of these concepts: - (A) An increase in the demand for loanable funds could lead to higher interest rates, which might attract foreign capital, potentially appreciating the currency. - (B) An increase in the supply of loanable funds could lower interest rates, potentially encouraging investment and capital formation. - (C) An increase in the supply of money can lead to inflation, which may cause currency depreciation and discourage capital formation due to the erosion of purchasing power. - (D) A budget surplus typically indicates that a government is saving more than it is spending, which could strengthen the currency and encourage capital formation. - (E) A decrease in the demand for money could indicate a slowing economy, which might not directly lead to currency depreciation or discourage capital formation
step 3
Based on the analysis in step 2, the option that aligns most closely with the scenario of causing a currency to depreciate while discouraging capital formation is an increase in the supply of money
Answer
C
Key Concept
Currency depreciation and discouragement of capital formation due to inflation
Explanation
An increase in the supply of money can lead to inflation, which may cause currency depreciation and discourage capital formation as it erodes the value of savings and reduces the incentive to invest.

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