A contractionary monetary policy generally results in a capital inflow and a current account deficit.

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically involves increasing interest rates, which attracts foreign investment due to higher returns, leading to capital inflow. This can appreciate the domestic currency, making exports more expensive and imports cheaper, potentially leading to a current account deficit as the value of imports may exceed the value of exports.

A Contractionary Monetary Policy Generally Results in a Capital Inflow