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AP® Macroeconomics

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Interaction of Monetary Policy and International Value of Dollar

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Suppose the Federal Reserve decides to implement a contractionary monetary policy to fight inflation in the United States. Which of the following would describe the changes in the money market, the interest rate, and the international value of the dollar?

A

Money supply increases; interest rate increases; and international value of the dollar increases.

B

Money supply decreases; interest rate increases; and international value of the dollar increases.

C

Money supply increases; interest rate decreases; and international value of the dollar increases.

D

Money supply decreases; interest rate increases; and international value of the dollar decreases.

E

Money supply decreases; interest rate decreases; and international value of the dollar decreases.