Figure 13.3 Panel (a) Panel (b) -Refer to Figure 13.3.If exchange rates are floating,fiscal policy designed to reduce the federal deficit and the typical central bank response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b). A) point A to point D; point X to point Y B) point C to point B; point X to point Y C) point D to point A; point Y to point X D) point B to point C; point Y to point X

Question

Quizplus · Accepted Answer

Fiscal policy to reduce the deficit typically involves reducing government spending or increasing taxes, which can decrease aggregate demand and inflation. The central bank may respond by lowering interest rates to counteract the reduced demand, leading to a depreciation of the currency. This scenario is represented by a movement from point A to point D in panel (a) and point X to point Y in panel (b).

Figure 13.3 Panel (A) Panel (B)