Suppose the economy experiences a recessionary gap.Expansionary monetary policy will _______ interest rates and _______ exchange rates.

Question

Quizplus · Accepted Answer

When the economy experiences a recessionary gap, the central bank will likely implement expansionary monetary policy, such as decreasing interest rates. This will lower the return on investments in that country, making it less attractive for foreign investors and decreasing demand for that country's currency, leading to a decrease in exchange rates. Therefore, the correct answer is that expansionary monetary policy will decrease interest rates and decrease exchange rates, as shown in choice D.

Suppose the Economy Experiences a Recessionary Gap