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a contractionary monetary policy raises the interest rate but reduces the exchange rate. true/fale. explain your...

a contractionary monetary policy raises the interest rate but reduces the exchange rate. true/fale. explain your choice
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Answer #1

Contraction monetary policy is taken by the Central bank by reducing money supply from the economy to fight for inflation. The bank increases the interest rate to make lending expensive. As GNP decreases because of contractionary policy, the price will be decreased. The bond price will be decreased. On the other hand, higher interest rates make the domestic bond more attractive, therefore the demand for domestic bonds will be increased, thus the demand for domestic currency would increase and demand for foreign currency fall. As the value of the domestic currency is more than that of foreign currency, the exchange rate will be raised.

So the statement is false

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