In a Large Open Economy with a Floating Exchange Rate

Multiple Choice

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

A) raises the interest rate, lowers investment and income, but does not affect the exchange rate.
B) raises the exchange rate, lowers net exports and income, but does not affect the interest rate.
C) initially raises the exchange rate, causing arbitrageurs to sell dollars and return the money supply to its initial level.
D) raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.