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

Question

Quizplus · Accepted Answer

Increasing government spending and revaluing the currency could lead to a greater trade deficit by making imports cheaper and exports more expensive, thus increasing the volume of imports relative to exports. However, the increase in government spending could offset the decrease in net exports, leaving aggregate demand constant.

In a Fixed Exchange Rate Regime,which of the Following Policies