For this question, assume that equilibrium output is determined in the ZZ - Y di

Question

For this question, assume that equilibrium output is determined in the ZZ- Y diagram. Further assume that policy makers' goals are: (1) to achieve balanced trade (i.e., NX = 0); and (2) to achieve the natural level of output, say Yn. Now suppose that the initial level of equilibrium output is equal to Yn (i.e., Y = Yn) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?

Select one:

a. A decrease in government spending and the real exchange rate.

b. A decrease in the real exchange rate.

c. A decrease in government spending.

d. A decrease in taxes and increase in the real exchange rate.

e. Convince the country's trading partners to pursue policies that will cause an increase in foreign income.

Can anyone help me explain that thanks!

Explanation / Answer

a. A decrease in government spending and the real exchange rate.

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