Without considering the effect that a change in the value of a currency might have on trade, the net effect of an expansionary fiscal policy is:
A)ambiguous with respect to the trade balance, but positive with respect to the exchange rate.
B)ambiguous with respect to the exchange rate, but negative with respect to the trade balance.
C)negative with respect to the exchange rate and positive with respect to the trade balance.
D)positive with respect to the exchange rate and negative with respect to the trade balance.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves increasing government spending or decreasing taxes, tends to increase domestic income and demand. This can lead to increased imports, worsening the trade balance. The effect on the exchange rate is ambiguous without considering the impact of changes in currency values on trade flows.

Without Considering the Effect That a Change in the Value