Suppose the U.S.policy mix remains constant while major European nations switch to an easier fiscal and tighter monetary policy.With ________ European interest rates,the resulting ________ of the dollar eventually tends to ________ the U.S.foreign trade deficit.

Question

Quizplus · Accepted Answer

If major European nations switch to an easier fiscal policy and tighter monetary policy, it means that they are lowering their interest rates. Lower interest rates would make it less attractive for investors to hold a currency, resulting in a depreciation of the currency, in this case, the Euro. With the Euro depreciating, the dollar would appreciate, leading to a decrease in the U.S. foreign trade deficit.