If the economy experiences an inflationary gap, a contractionary monetary policy will
A) increase interest rates and increase exchange rates.
B) increase interest rates and decrease exchange rates.
C) decrease interest rates and increase exchange rates.
D) decrease interest rates and decrease exchange rates.

Question

Quizplus · Accepted Answer

A contractionary monetary policy typically involves increasing interest rates to reduce inflationary pressures. Higher interest rates can attract foreign capital, leading to an appreciation of the domestic currency, thus increasing exchange rates.

If the Economy Experiences an Inflationary Gap, a Contractionary Monetary