Other things equal, in an open economy, monetary policy to offset a contractionary gap will tend to
A)Lower the exchange value of the dollar and lower net exports.
B)Lower the exchange value of the dollar and raise net exports.
C)Raise the exchange value of the dollar and lower net exports.
D)Raise the exchange value of the dollar and raise net exports.

Question

Other things equal, in an open economy, monetary policy to offset a contractionary gap will tend t​o
A)​Lower the exchange value of the dollar and lower net exports.
B)​Lower the exchange value of the dollar and raise net exports.
C)​Raise the exchange value of the dollar and lower net exports.
D)​Raise the exchange value of the dollar and raise net exports.

Quizplus · Accepted Answer

Monetary policy aimed at offseting a contractionary gap typically involves lowering interest rates to stimulate economic activity. Lower interest rates reduce the return on investments denominated in the country's currency, which tends to lower the exchange value of the currency. A weaker currency makes exports cheaper and imports more expensive, thereby raising net exports.

Other Things Equal, in an Open Economy, Monetary Policy to Offset