Final answer:
The expected outcomes of the U.S. implementing a contractionary monetary policy are a reduction in both inflation and the trade surplus, as the domestic currency appreciates, making exports more expensive and imports cheaper.
Step-by-step explanation:
Inflation to become less severe--surplus to become less severe.
When the United States implements a contractionary monetary policy, domestic interest rates would increase. This rise in interest rates would typically lead to an appreciation of the U.S. dollar. As a result, from the perspective of foreign buyers, U.S. exports would become more expensive, leading to a reduction in exports. At the same time, imports would seem cheaper to domestic consumers, leading to an increase in imports. This shift in trade balance would reduce the trade surplus as the net exports (exports minus imports) decrease.
On the domestic front, higher interest rates usually dampen investment and spending, causing the aggregate demand to fall. This reduced demand can help to rein in inflation, as there would be less money chasing the same amount of goods and services. In essence, both inflation and trade surplus are expected to become less severe with a contractionary monetary policy. However, if imports become significantly cheaper, this could potentially stimulate aggregate supply, which might counteract the fall in aggregate demand, helping to maintain GDP closer to its potential at a lower price level.