When Fed policy is being used to offset a contractionary gap, which of interest rates, investment, net exports and aggregate demand moves in the opposite direction from the others?
A)Interest rates.
B)Investment.
C)Net Exports.
D)Aggregate demand..

Question

When Fed policy is being used to offset a contractionary gap, which of interest rates, investment, net exports and aggregate demand moves in the opposite direction from the others?​
A)​Interest rates.
B)​Investment.
C)​Net Exports.
D)​Aggregate demand..

Quizplus · Accepted Answer

When the Fed implements contractionary monetary policy to offset a contractionary gap, they do so by raising interest rates, which makes borrowing more expensive and reduces investment. This decrease in investment then reduces net exports, as there is less demand for goods and services. However, the increase in interest rates also strengthens the domestic currency, making exports more expensive and reducing the demand for them. Aggregate demand then falls as a result of the reduction in investment and net exports. Therefore, interest rates move in the opposite direction from the other variables as the Fed implements contractionary policy to fix a contractionary gap.

When Fed Policy Is Being Used to Offset a Contractionary