Question

Imagine that there are two economies in the​ world: Bostonia and New Yorkland.​ Bostonia's currency is the sock and New​ Yorkland's is the yank. Despite the​ long-standing rivalry between their​ citizens, Bostonia and New Yorkland are trading partners. The Central Bank of New Yorkland decides to conduct contractionary monetary policy. What would be the​ short-run effect, if​ any, on the​ yank/sock nominal exchange​ rate?

Answer 1

Yank appreciates in relation to Sock

Step-by-step explanation:

A contractionary monetary policy either results in increased interest rates in New Yorkland or reduced money supply or both.

Increased interest rated would mean that people would save more to take advantage of an increased saving rate. This would cause people to save money and thus reduce the supply of money. The law of demand and supply suggests that lesser supply would up the price that is it would appreciate. This is also true as people in Bostonia may also want to save in New Yorkland thus reducing the supply further as they demand more Yank.

Reducing the money supply any other way would mean as both countries are trade partners there will be demand for Yank but as supply is constricted, it would again appreciate.

Hope that helps.