When a country runs a balance of payments deficit under a system of fixed exchange rates, which of the following is NOT part of the automatic adjustment process?
A)a decrease in money supply leads to a lower level of spending
B)a decrease in aggregate demand lowers domestic prices
C)a decrease in domestic prices relative to foreign prices reduces the level of imports
D)an increase in tariffs reduces the level of imports
E)an increase in unemployment leads to lower wages

Question

Quizplus · Accepted Answer

An increase in tariffs reduces the level of imports is not part of the automatic adjustment process under a system of fixed exchange rates. Tariffs are a policy tool that must be chosen and implemented by the government, rather than a mechanism that operates automatically to restore balance in the balance of payments. The other options listed are all automatic adjustment processes that occur under a system of fixed exchange rates.

When a Country Runs a Balance of Payments Deficit Under