The international trade response to a contractionary monetary policy will cause aggregate demand to shift ____ and aggregate supply to shift ____.

Question

Quizplus · Accepted Answer

A contractionary monetary policy reduces the money supply and raises interest rates, making domestic goods more expensive and less attractive to foreign buyers. As a result, exports decrease, and import demand increases, leading to an increase in imports. This, in turn, reduces domestic demand for goods and services, shifting the aggregate demand curve inward. The increase in imports also increases the supply of goods available in the market, leading to an outward shift of the aggregate supply curve. Therefore, the correct answer is option B.

The International Trade Response to a Contractionary Monetary Policy Will