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How do Contractionary Monetary reduce the money supply and inflation in an economy
Central Bank raises interest rates
How do high interest rates affect exchange rates?
Increases demand, lowers supply, which appreciates the dollar
How do high interest rates affect net exports?
appreciates the currency, which reduces exports, and increases imports
How do expansionary Monetary policies increase the money supply and economic growth
Central Bank reduces interest rates
How do low interest rates affect exchange rates?
reduces demand, increases supply, which depreciates the dollar
How do low interest rates affect net exports?
depreciates currency, which increases exports, and reduces imports
Nominal Exchange Rate (e)
value of domestic currency vs foreign
Real Exchange Rate (r)
value of domestic goods vs foreign goods
Nominal Exchange Rate (e) equation
e = foreign currency/domestic currency
Real exchange rate (r) equation
r=(e x domestic price)/foreign price
