Compared to the baseline, the short-run effect of a monetary policy change to lower inflation is for
A)consumption and net exports to decline, while investment stays constant.
B)consumption, investment, net exports, and government purchases to decline.
C)consumption, investment, and net exports to decline.
D)consumption and investment to decline while net exports increase.
E)consumption and net exports to increase while investment falls.

Question

Quizplus · Accepted Answer

A monetary policy change to lower inflation typically involves an increase in interest rates. This leads to a decrease in consumption and investment, as borrowing becomes more expensive. Additionally, a higher exchange rate due to the increase in interest rates makes exports more expensive, leading to a decrease in net exports. However, government purchases are not directly affected by a monetary policy change to lower inflation. Therefore, only consumption, investment, and net exports will decline in the short-run.

Compared to the Baseline, the Short-Run Effect of a Monetary