Suppose the U.S. economy is going into a recession. Considering the effect of monetary policy on trade through its impact on income only, the domestic problem calls for:
A)contractionary monetary policy, which will increase the U.S. trade deficit.
B)contractionary monetary policy, which will decrease the U.S. trade deficit.
C)expansionary monetary policy, which will increase the U.S. trade deficit.
D)expansionary monetary policy, which will decrease the U.S. trade deficit.

Question

Quizplus · Accepted Answer

Expansionary monetary policy is typically used to combat a recession by lowering interest rates, which stimulates domestic investment and consumption. This increase in domestic income leads to higher imports, which can widen the trade deficit.