Within a fixed exchange rate system,the effect of an expansionary fiscal policy action on the balance of payments will be to
A)worsen the balance on the capital account but improve the trade balance.
B)worsen the trade balance but improve the balance on the capital account.
C)worsen both the trade balance and the balance on the capital account.
D)improve both the trade balance and the balance on the capital account.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy will lead to an increase in aggregate demand, which will lead to an increase in imports and a decrease in exports, worsening the trade balance. The increase in aggregate demand will also lead to an increase in interest rates, which will attract capital inflows and improve the balance on the capital account. However, the overall effect on the balance of payments will be negative, as the worsening of the trade balance will outweigh the improvement in the balance on the capital account.

Within a Fixed Exchange Rate System,the Effect of an Expansionary