In considering the net effect of expansionary fiscal policy on the trade deficit
ID: 1092255 • Letter: I
Question
In considering the net effect of expansionary fiscal policy on the trade deficit, the A. Income and price effects work in the same direction, so the trade deficit is increased B. Income and price effects work in the same direction, so the trade deficit is decreased C. Income effect offsets the price effect D. Price effect offset the income effectIn considering the net effect of expansionary fiscal policy on the trade deficit, the A. Income and price effects work in the same direction, so the trade deficit is increased B. Income and price effects work in the same direction, so the trade deficit is decreased C. Income effect offsets the price effect D. Price effect offset the income effect
A. Income and price effects work in the same direction, so the trade deficit is increased B. Income and price effects work in the same direction, so the trade deficit is decreased C. Income effect offsets the price effect D. Price effect offset the income effect
Explanation / Answer
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In a recession, an expansionary fiscal policy increases the income of the population. That is the income effect.
The increase in the money supply may or may not weaken the currency (depending on how the economy responds to the stimulus). If it does, that would be the price effect. It makes domestic prices of imported goods higher, and makes the foreign prices of domestic goods lower.
If income goes up, do people buy more or fewer imports?
If import prices go up, do people buy more or fewer imports?
If the foreign prices of exports go down, does the economy export more or less?
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