Suppose that government purchases decrease and that the Fed acts to prevent any change in
The U.S.exchange rate.This action necessarily requires

Question

Quizplus · Accepted Answer

If government purchases decrease, it would decrease GDP, leading to a decrease in inflation. To prevent the exchange rate from changing, the Fed would have to decrease the money supply to avoid the offsetting effect of declining inflation. Therefore, the best choice is B, a decrease in the money supply.

Suppose That Government Purchases Decrease and That the Fed Acts