In an open economy, a contractionary monetary policy causes:
A) interest rates to rise and inflows of foreign capital.
B) interest rates to fall and inflows of foreign capital.
C) interest rates to rise and outflows of foreign capital.
D) interest rates to fall and outflows of foreign capital.
E) interest rates to fall and aggregate demand to be unchanged.

Question

Quizplus · Accepted Answer

A contractionary monetary policy typically involves reducing the money supply or increasing interest rates. Higher interest rates make domestic assets more attractive to foreign investors, leading to inflows of foreign capital.

In an Open Economy, a Contractionary Monetary Policy Causes