When the Fed practices contractionary monetary policy,the interest rate:
A)goes up,and the exchange rate will appreciate as a result.
B)goes up,and the exchange rate will depreciate as a result.
C)goes down,and the exchange rate will appreciate as a result.
D)goes down,and the exchange rate will depreciate as a result.

Question

Quizplus · Accepted Answer

Contractionary monetary policy aims to reduce the money supply and increase interest rates. As interest rates increase, foreign investors become attracted to the higher yields, leading to an increase in demand for the domestic currency. This increase in demand causes the exchange rate to appreciate. Therefore, option A is the correct answer.

When the Fed Practices Contractionary Monetary Policy,the Interest Rate