A contractionary monetary policy lowers equilibrium real GDP in the short run by

Question

A contractionary monetary policy lowers equilibrium real GDP in the short run by increasing the interest rate. In an open economy, the net export effect reinforces the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, lowers U.S. imports and causes the real GDP to fall. reinforces the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, lowers U.S. exports and causes the real GDP to fall. has no effect on real GDP since changes in exports and imports cancel each other. weakens the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, increases U.S. exports and causes the real GDP to increase.

Explanation / Answer

Answer B

The net export effect of contractionary monetary policy are
Boosts the market interest rate
Higher rates attract foreign investment
International price of dollar rises
Appreciation of dollar reduces net exports
Negative net export effect

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