If the government of a country adopts a contractionary monetary policy,________.

Question

Quizplus · Accepted Answer

When the government adopts a contractionary monetary policy, it is aiming to decrease the money supply in the economy which leads to a rise in the real interest rate.

An increase in the real interest rate makes domestic assets more attractive to foreign investors, causing an increase in the demand for the domestic currency.

However, as the domestic currency appreciates, net exports decrease due to a rise in the price of domestic goods and a fall in the price of foreign goods. Hence, the decrease in net exports and an increase in the exchange rate are observed.

If the Government of a Country Adopts a Contractionary Monetary