If a country with a floating exchange rate follows a contractionary monetary policy, with everything else remaining unchanged, it leads to a(n) _____ in interest rates and a(n) _____ in the currency.

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically involves reducing the money supply or increasing interest rates, which makes borrowing more expensive. This tends to increase interest rates. Higher interest rates attract foreign investors looking for the best return on their investments, which increases demand for the country's currency, leading to its appreciation.

If a Country with a Floating Exchange Rate Follows a Contractionary