Considering an economy with a current trade surplus and considering only the direct effect of income, an expansionary monetary policy tends to:
A)decrease the exchange rate and increase the trade surplus.
B)increase the exchange rate and increase the trade surplus.
C)decrease the exchange rate and decrease the trade surplus.
D)increase the exchange rate and decrease the trade surplus.

Question

Quizplus · Accepted Answer

An expansionary monetary policy typically leads to a decrease in interest rates, which tends to depreciate the domestic currency (decrease the exchange rate), making exports cheaper and imports more expensive. However, because the policy also stimulates domestic income and consumption, it increases the demand for imports, which can decrease the trade surplus.

Considering an Economy with a Current Trade Surplus and Considering