If restrictive monetary policy, that would lead to increase in rates…which would lead to increased investment in curency, which would lead to currency appreciating… wouldnt that lead to increased imports over exports? Question I just ran into said increasing value of the dollar which would increase net exports. Can anyone rationalize this? THanks
Restrictive Monetary Policy => consumption in the country decreases => aggregate demand decreases => Imports fall & net exports increase
But if we break it down, don’t interest rates rise, and that attracts investors which increases the currency??
Yes… Restrictive Monetary Policy impacts in three ways:-
Slows economic growth => aggregate dd. falls => net exports increase => DC (domestic currency) appreciates
Inflation falls => DC appreciates
Increases real interest rates => DC appreciates
Hope that helps…