Suppose that the Fed decides to decrease the growth rate of the money supply in the United States.What is most likely to happen to the U.S.trade deficit and to GDP?
A)The trade deficit will fall; GDP will fall.
B)The trade deficit will rise; GDP will rise.
C)The trade deficit will fall; GDP will rise.
D)The trade deficit will rise; GDP will fall.

Question

Quizplus · Accepted Answer

Decreasing the growth rate of the money supply in the United States will likely result in higher interest rates and a stronger dollar. This will make U.S. exports more expensive and imports cheaper, leading to an increase in the trade deficit. Furthermore, the decrease in the money supply growth rate can lead to a decrease in overall economic activity and GDP.

Suppose That the Fed Decides to Decrease the Growth Rate