The Net Export Effect of Monetary Policy

Open economy

An economy that allows the exchange of both goods and assets with other countries.

Expansionary Monetary Policy

A monetary policy that increases the money supply, leading to currency depreciation.

Effect of Increase in Money Supply on Interest Rates

An increase in the money supply results in falling interest rates.

Impact of Lower Interest Rates on Domestic Currency

Lower interest rates make domestic financial assets less attractive to foreign investors, leading to less demand for domestic currency.

Currency Depreciation

A decline in the value of domestic currency, making exports cheaper and imports more expensive.

Aggregate Demand

The total demand for goods and services within a particular market.

Contractionary Monetary Policy

A monetary policy that decreases the money supply, resulting in currency appreciation.

Effect of Decrease in Money Supply on Interest Rates

A decrease in the money supply results in rising interest rates.

Impact of Higher Interest Rates on Domestic Currency

Higher interest rates make domestic assets more attractive to foreign investors, increasing demand for domestic currency.

Currency Appreciation

An increase in the value of domestic currency, making exports more expensive and imports cheaper.