Suppose that the United States were to enact tight monetary policy during a period of fiscal stimulus. Which of the following implications would be consistent with real exchange rate theory?
A) A large influx of dollars might negate the monetary policy.
B) A large depreciation in the value of the dollar might be expected.
C) A large increase in interest rates abroad might be expected.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

Real exchange rate theory suggests that a tight monetary policy in the United States would lead to a large depreciation in the value of the dollar, as investors would sell dollars to buy assets in other countries with higher interest rates. This would make US exports more competitive and imports more expensive, leading to an increase in the demand for dollars and a decrease in the supply of dollars, resulting in a depreciation of the dollar.

Suppose That the United States Were to Enact Tight Monetary