Question

If restrictive monetary policy results in a slowdown in thedomestic inflation rate and higher real interest rates, otherthings constant, the:

a.nations currency will appreciate
b. nations currency will depreciate
c. nation will run a balance of trade surplus
d. nation will run a capital account decicit

Answer 1

A contractionary monetary policy would lead to an appreciation of a nation's currency, reducing exports and increasing imports. This would cause a decrease in aggregate demand and GDP but can stimulate aggregate supply. b. nations currency will depreciate

Step-by-step explanation:

A contractionary monetary policy, characterized by higher domestic interest rates, would result in the appreciation of a nation's currency. The increased value of the currency in foreign exchange markets makes exports more expensive for foreign buyers and stimulates imports as they become cheaper for domestic buyers.

This reduction in exports and increase in imports cause net exports (EX - IM) to decline, leading to a decrease in aggregate demand and GDP. However, cheaper imports can also stimulate aggregate supply, bringing GDP back to potential but at a lower price level.