What is the net export effect of a contractionary monetary policy?

The net export effect of a contractionary monetary policy is that it reinforces the contractionary effect as the value of the dollar increases and lowers U.S. exports.

When a contractionary monetary policy is implemented, interest rates tend to rise. Higher interest rates attract foreign capital seeking better returns, which can lead to an appreciation of the U.S. dollar. With a stronger dollar, U.S. goods and services become more expensive for foreign buyers, leading to a decline in exports. At the same time, imported goods become cheaper for Americans, which typically results in an increase in imports.

The overall consequence of this scenario is that the net exports (exports minus imports) decrease. This reduction in net exports can further exacerbate the contraction in economic activity, reinforcing the slowdown initiated by the monetary tightening. As the economy slows, firms may reduce production, leading to lower overall GDP growth.

In summary, the mechanics of how a stronger dollar interacts with exports and imports illustrate why this answer correctly captures the economic implications of contractionary monetary policy.