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

A contractionary fiscal policy reduces aggregate demand, which leads to a decrease in imports and an increase in exports, resulting in a positive trade balance. However, the effect on the exchange rate is ambiguous as it depends on the relative strength of the contractionary effect on domestic demand and the expansionary effect on net exports.

Without Considering the Effect That a Change in the Value