If you were told that the exchange rate had become more sensitive to changes in the interest rate, then you would conclude that
A) monetary policy had become less effective in stabilizing GDP in the short run.
B) monetary policy had become more effective in stabilizing GDP in the short run.
C) monetary policy had become less effective in stabilizing GDP in the long run.
D) monetary policy had become more effective in stabilizing GDP in the long run.
E) monetary policy had become less effective in stabilizing GDP not only at home, but also throughout the rest of the world.

Question

Quizplus · Accepted Answer

When the exchange rate is more sensitive to changes in the interest rate, monetary policy actions (like changing the interest rate) have a stronger impact on the exchange rate. This can make monetary policy more effective in stabilizing GDP in the short run because adjustments in interest rates can more effectively influence economic activity through changes in the exchange rate.

If You Were Told That the Exchange Rate Had Become