00:01
So let's go over this question.
00:03
We're going to use the ddaa model and uncovered interest parity rule to analyze the effect on the labor supply when the government has a contractionary monetary policy.
00:22
So with a contractionary monetary policy, this reduces inflationary pressures by increasing interest rates.
00:54
Higher interest rates make borrowing money more expensive, which discourage investment and consumption.
01:29
So with a contractionary monetary policy, there's a decrease in the labor supply.
01:40
With less consumption, it would make sense that the labor supply would go down.
01:49
Because if people are consuming less, then they're less likely to find work to make more money.
02:02
So that's why labor supply would go down.
02:13
So how does that affect domestic output? so with a reduced labor supply, that leads to lower production levels.
02:22
So there's a decrease in overall output.
02:31
So less workers means less output.
02:36
Then with consumption, as we talked about, interest rates go up with contractionary monetary policy and borrowing is more expensive, discouraging consumer spending.
02:54
So there is a decrease in consumption.
02:56
And as we stated, interest rate is going to go up...