A central bank increases its main policy interest rate to combat rising demand-pull inflation. This contractionary monetary policy is least likely to succeed in reducing aggregate demand if, at the same time:
the exchange rate of the domestic currency appreciates significantly, lowering net export demand.
consumer confidence drops, leading to an increase in the household savings ratio.
the government pursues contractionary fiscal policy by reducing its capital expenditure.
commercial banks absorb the rate rise by narrowing their interest spreads and keeping lending rates unchanged.
