Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because:
A)changes in the domestic interest rate cause changes in domestic investment spending.
B)changes in the domestic interest rate tend to cause changes in the international value of the dollar.
C)the domestic interest rate varies inversely with the value of the dollar.
D)changes in the interest rate cause changes in domestic saving.

Question

Quizplus · Accepted Answer

Changes in domestic interest rates tend to cause changes in the international value of the dollar, which can affect international trade and the balance of payments. For example, if domestic interest rates increase relative to those of other countries, demand for domestic currency may increase, leading to an appreciation of the dollar. This can make domestic exports more expensive and less competitive in foreign markets, while making imported goods cheaper in the domestic market. Therefore, if the goal is to correct a trade imbalance, policymakers may need to consider the international implications of domestic monetary policy.

Under Some Conditions, Proper Domestic Monetary Policy May Be at Odds