Under a system of fixed exchange rates, a nation which experiences chronic balance of payments deficits may:
A)initiate protectionist trade policies.
B)run short of international monetary reserves.
C)be forced to use contractionary monetary and fiscal policies.
D)do all of the above.

Question

Quizplus · Accepted Answer

Under a system of fixed exchange rates, a nation which experiences chronic balance of payments deficits may do all of the above (initiate protectionist trade policies, run short of international monetary reserves, and be forced to use contractionary monetary and fiscal policies) to address the situation.

Initiating protectionist trade policies can help to reduce imports and increase exports in order to improve the balance of payments; however, this can have negative consequences like retaliation from other nations, reduced competitiveness, and slower economic growth.

Running short of international monetary reserves can lead to devaluation of the currency, which can make imports more expensive and exports cheaper, and ultimately improve the balance of payments. However, it can also lead to inflation, slower economic growth, and reduced confidence from foreign investors.

Using contractionary monetary and fiscal policies (such as raising interest rates and reducing government spending) can reduce domestic demand, which can lead to lower imports and a lower trade deficit. However, this can also cause slower economic growth, higher unemployment, and reduced consumer and investor confidence.

Therefore, a combination of these measures may be necessary to address chronic balance of payments deficits under a fixed exchange rate system.

Under a System of Fixed Exchange Rates, a Nation Which