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

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). This depreciation makes exports cheaper and imports more expensive, potentially increasing exports and decreasing imports, which could increase the trade deficit if the increase in imports outweighs the increase in exports. However, the direct effect on income through cheaper exports and more expensive imports tends to decrease the trade deficit by making domestic goods more competitive internationally.

Considering an Economy with a Current Trade Deficit and Considering