Question 1.
The openness of the economy and flexible exchange rates
▸ increase the effectiveness of a contractionary monetary policy, but reduce the effectiveness of an expansionary monetary policy.
▸ reduce the effectiveness of both expansionary and contractionary monetary policies.
▸ increase the effectiveness of both expansionary and contractionary monetary policies.
▸ increase the effectiveness of an expansionary monetary policy, but reduce the effectiveness of a contractionary monetary policy.
Question 2.
If the Fed reduces the money supply to reduce inflation, a floating exchange rate will aid the Fed in fighting inflation because
▸ as the money supply is decreased, the interest rate will increase, and the price of U.S. exports will fall and the price of U.S. imports will rise.
▸ as the money supply is decreased, the interest rate will increase, and the price of U.S. exports will rise and the price of U.S. imports will fall.
▸ as the money supply is decreased, the interest rate will increase, and the price of both U.S. exports and U.S. imports will rise.
▸ as the money supply is decreased, the interest rate will increase, and the price of U.S. exports and U.S. imports will fall.
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