If the government pursues a restrictive monetary policy, then it will:
A)increase domestic interest rates, cause the dollar to appreciate, and decrease net exports.
B)decrease domestic interest rates, cause the dollar to depreciate, and increase net exports.
C)increase domestic interest rates, cause the dollar to depreciate, and increase net exports.
D)increase domestic interest rates, cause the dollar to appreciate, and increase net exports.

Question

Quizplus · Accepted Answer

A restrictive monetary policy involves decreasing the money supply, which leads to an increase in interest rates. This increase in interest rates attracts foreign investment, causing the demand for the domestic currency to rise, which appreciates the dollar. As the dollar appreciates, exports become more expensive, and imports become less expensive, leading to a decrease in net exports.

If the Government Pursues a Restrictive Monetary Policy, Then It