Question

8. Under the assumption of price stickiness, monetary contraction leads the real money stock to ________;...

8. Under the assumption of price stickiness, monetary contraction leads the real money stock to ________; the real interest rate to _______; and the domestic currency to _________ in the short-run.

  1. rise; fall; depreciate
  2. rise; fall; appreciate
  3. drop; rise; appreciate
  4. drop; fall; appreciate
  5. rise; rise; depreciate
  6. drop; fall; depreciate
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Answer #1

Money contraction shifts the money supply curve to the left and price is assumed to be sticky. Hence as a result the real money stock decreases. A decrease in money stock increases the real interest rate. A high real interest rate reduces the net capital outflow and in turn reduces the supply of comestic currency in the market for foreign exchange. The fall in the supply of domestic currency causes a real exchange rate to appreciate.

Answer: option (C) i.e., drop; rise; appreciate.

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