If the Fed does not take into account the additional policy channels available in an open economy,then ________ when conducting contractionary monetary policy.
A)it is likely to decrease GDP too much and cause a recession
B)it is likely to decrease GDP too little and inflation will persist
C)it is likely to increase GDP too much and inflation will persist
D)it is likely to increase GDP too little and cause a recession

Question

Quizplus · Accepted Answer

When conducting contractionary monetary policy, the Fed will likely decrease the money supply and increase interest rates, which will lead to a decrease in consumption and investment spending. In an open economy, however, these effects are mitigated by other policy channels such as exchange rate changes and capital flows. If the Fed does not take these channels into account, it is likely to decrease GDP too much and cause a recession.

If the Fed Does Not Take into Account the Additional