Britain has instituted a contractionary monetary policy to fight inflation. The pound is floating.

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QUESTION:

Britain has instituted a contractionary monetary policy to fight inflation. The pound is floating.

a. If the exchange-rate value of the pound remains steady, what are the effects of tighter money on British domestic product and income? What is the effect on the British inflation rate? Explain.

b. Following the shift to tighter money, what is the pressure on the exchange-rate value of the pound? Explain.

c. What are the implications of the change in the exchange-rate value of the pound for domestic product and inflation in Britain? Does the exchange-rate change tend to re-inforce or counteract the contractionary thrust of British monetary policy? Explain.


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