International Economics 14th Edition by Thomas Pugel

Exercise 6

Britain has instituted a contractionary monetary policy to fight inflation. The pound is floating.
a. If the exchange rate value of the pound remained steady, what are the effects of tighter money on British domestic product and income What is the effect on the British inflation rate Explain.
b. Following the shift to tighter money, what is the pressure on the exchange rate value of the pound Explain.
c. What are the implications of the change in the exchange rate value of the pound for domestic product and inflation in Britain Does the exchange rate change tend to reinforce or counteract the contractionary thrust of British monetary policy Explain.