Suppose that a country has floated its currency and the central bank sets a contractionary monetary policy. Which outcome is likely to occur?

Question

Quizplus · Accepted Answer

A contractionary monetary policy, which entails a decrease in money supply through higher interest rates or reduced government spending, would likely result in higher interest rates. Higher interest rates would attract foreign investment and increase the value of the country's currency, leading to an appreciation. Additionally, the decrease in money supply would reduce aggregate demand and potentially shrink any inflationary gap.

Suppose That a Country Has Floated Its Currency and the Central