In considering the net effect of expansionary fiscal policy on the trade deficit, the:
A)income effect offsets the price effect.
B)price effect offsets the income effect.
C)income and price effects work in the same direction, so the trade deficit is decreased.
D)income and price effects work in the same direction, so the trade deficit is increased.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves increasing government spending or decreasing taxes, typically leads to higher income and demand within an economy. This increased demand often leads to higher imports, as consumers and businesses buy more foreign goods. At the same time, the increased demand can lead to higher prices domestically, making exports less competitive abroad. Both the income effect (increased demand leading to more imports) and the price effect (higher domestic prices making exports less competitive) work in the same direction to increase the trade deficit.

In Considering the Net Effect of Expansionary Fiscal Policy on the Trade