In a fixed exchange rate regime, which of the following policies could be implemented to increase a trade deficit and leave aggregate demand constant?
A) Increase government spending and devalue the currency.
B) Decrease government spending.
C) Increase government spending and revalue the currency.
D) Increase government spending.
E) Revalue the currency.

Question

Quizplus · Accepted Answer

Increasing government spending would increase the trade deficit by boosting imports, while revaluing the currency would make exports more expensive and imports cheaper, further increasing the trade deficit. The revaluation offsets the increase in aggregate demand from higher government spending, keeping it constant.

In a Fixed Exchange Rate Regime, Which of the Following