Price for the dollar will rise. Net exports will decrease. US demands more imports. Contractionary policy causes interest rates to rise. Such a rise will induce international inflows of funds, thereby raising the international value of the dollar and making US goods less attractive abroad. The net export effect of contractionary monetary policy will be in the same direction as the monetary policy effect thereby amplifying the effect of such policy. The Net Export Effect of Expansionary Monetary Policy. Causes interest rates to fall. Funds will flow out of the US. Demand for dollars will decrease. Price for dollar will fall. Imports will fall exports rise. 354. Monetary Policy and Inflation. Short-run prices fluctuate. Long-run empirical studies show excessive growth in money supply results in inflation. The Equation of Exchange and the Quantity Theory. Ms V=PY. Example of the formula. Ms=actual money values held by nonbanking public.V=Income velocity, which is the number of times, on average per year, each monetary unit is spent on final goods and services.P=Price level or price index.Y=Real GDP per year.The Equation of Exchange as an Identity. Must always be true, it is an accounting identity. Ms V=PY=nominal GDPThe Quantity Theory of Money and Prices. Assuming V is constant and Y is constant money supply increases 20% then P increases 20%. Must be in balance.