Net Export Effect of Monetary Policy
The net export effect is the channel by which monetary policy changes interest rates, which move the exchange rate and net exports, amplifying the policy's impact on AD.
Expansionary monetary policy lowers domestic interest rates, prompting financial capital to flow out in search of higher returns abroad; this raises supply of the home currency, depreciating it, which makes exports cheaper and imports dearer, so net exports and AD rise. Contractionary policy works in reverse: higher rates attract capital inflows, appreciate the currency, and shrink net exports. This open-economy channel reinforces the traditional interest-rate–investment channel, making monetary policy stronger in an open economy. AP free-response questions frequently chain: money supply → interest rate → capital flows → exchange rate → net exports.