A nation can eliminate domestic overemployment and a balance of payments surplus while maintaining a fixed exchange rate through

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Quizplus · Accepted Answer

Contractionary fiscal policy, which involves decreasing government spending and increasing taxes, will reduce domestic demand and therefore reduce overemployment. Expansionary monetary policy, which involves decreasing interest rates and increasing the money supply, will lower the value of the currency and make exports more competitive, reducing the balance of payments surplus. Maintaining a fixed exchange rate requires keeping the value of the currency stable, so expansionary monetary policy alone would not be sufficient as it would lead to depreciation and a violation of the fixed exchange rate.

A Nation Can Eliminate Domestic Overemployment and a Balance of Payments