As a result of contractionary monetary policy,the open-economy outcome,compared to the closed-economy outcome,features a ___________ fall in Real GDP and a ____________ fall in the price level.

Question

Quizplus · Accepted Answer

Contractionary monetary policy reduces the money supply, which leads to a decrease in aggregate demand. In an open economy, this decrease in aggregate demand leads to a fall in both real GDP and the price level. However, the fall in real GDP is larger in an open economy than in a closed economy because the decrease in aggregate demand also leads to a depreciation of the exchange rate, which makes imports more expensive and reduces exports.

As a Result of Contractionary Monetary Policy,the Open-Economy Outcome,compared to the Closed-Economy