Considering only its direct effect on income, contractionary monetary policy tends to:
A)be ambiguous with respect to the exchange rate but decrease the trade deficit.
B)be ambiguous with respect to the trade deficit but decrease the exchange rate.
C)decrease the exchange rate and increase the trade deficit.
D)increase the exchange rate and decrease the trade deficit.

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically involves increasing interest rates, which tends to attract foreign investment, increasing the demand for the domestic currency and thus increasing its value (exchange rate). A stronger currency makes imports cheaper and exports more expensive, potentially decreasing the trade deficit by reducing the volume of imports and/or increasing the value of exports.

Considering Only Its Direct Effect on Income, Contractionary Monetary Policy