A contractionary monetary policy causes

Question

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A contractionary monetary policy involves increasing interest rates, which makes it more expensive for consumers and businesses to borrow money. This leads to a decrease in spending and investment, causing a decrease in aggregate demand. The decrease in aggregate demand leads to lower output and prices. The higher interest rates also make it more attractive for foreign investors to invest in dollar-denominated assets, which increases demand for the dollar and raises its international value. This, in turn, decreases net exports as U.S. goods and services become more expensive for foreign buyers.

A Contractionary Monetary Policy Causes