Suppose you were told that net exports had become more sensitive to changes in GDP. In that case, you would expect 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 long 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 short run.
E) b and d.

Question

Quizplus · Accepted Answer

When net exports become more sensitive to changes in GDP, it implies that fluctuations in GDP have a larger impact on the trade balance. This can make it harder for monetary policy to stabilize GDP in the short run because changes in interest rates (a tool of monetary policy) can lead to more significant capital flows and exchange rate fluctuations, which in turn can cause larger swings in net exports and GDP.

Suppose You Were Told That Net Exports Had Become More