Assume the United States is currently running a current account deficit.The most effective way of eliminating this current account deficit would be to temporarily ________ government purchases and ________ the domestic money supply.

Question

Quizplus · Accepted Answer

Decreasing government purchases would reduce domestic demand, leading to a decrease in imports. Decreasing the domestic money supply would increase interest rates, appreciating the domestic currency and further reducing imports by making them more expensive, while also potentially increasing exports by making domestic goods cheaper for foreign buyers. Both actions together would help in eliminating the current account deficit.

Assume the United States Is Currently Running a Current Account