Question

How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?

Short answer

Contractionary monetary policy accustomed reduce the cash supply in an economy. within the situation of excess demand resulting in inflation, financial organization raises discount. the increase in discount forces the banks to extend their lending rate of interest which make credit costlier.

Step-by-step solution

Concept Introduction  

Monetary Policy- Monetary policy is employed to control and control the cash supply and credit in an economy. Hence, it's observed because the policy of the country's financial organisation. Money broadly refers to the currency and credit refers to the loans. The monetary policy of the financial organisation is also quantitative measures and qualitative measures.

Explanation of Solution  

Contractionary monetary policy accustomed reduce the cash supply in an economy. within the situation of excess demand resulting in inflation, financial organization raises discount. the increase in discount forces the banks to extend their lending rate of interest which make credit costlier. Consequently, demand for loans falls. Further hight charge per unit lured households to extend their savings by decreasing expenses. Contractionary Monetary policy helps to create currency stronger. A stronger currency will decrease the export and increase the import or the other way around.