A contractionary monetary policy tends to be more effective than a contractionary fiscal policy at strengthening the value of the exchange rate, because a contractionary monetary policy:

Question

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A contractionary monetary policy increases the interest rate, which makes domestic assets more attractive to foreign investors. This leads to an increase in the demand for the domestic currency, which strengthens its value. A contractionary fiscal policy, on the other hand, decreases both the interest rate and imports, which has a weaker effect on the exchange rate.

A Contractionary Monetary Policy Tends to Be More Effective Than