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

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically leads to higher interest rates, which attract foreign capital, increasing demand for the domestic currency and thus increasing its value (exchange rate). This can make domestic goods more expensive abroad, potentially decreasing exports and improving the trade balance (decreasing a trade deficit).

Considering Only Its Direct Effect on Income, Contractionary Monetary Policy