Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation.Other things equal, these policies will also
A) reduce a balance-of-payments surplus.
B) reduce a balance-of-payments deficit.
C) increase both imports and exports.
D) decrease both imports and exports.

Question

Quizplus · Accepted Answer

DContractionary monetary and fiscal policies in Mexico would likely increase interest rates, attracting foreign capital and appreciating the domestic currency, which would make imports cheaper and exports more expensive, thus reducing a balance-of-payments deficit. Additionally, by making domestic goods more expensive abroad and foreign goods cheaper domestically, these policies would decrease exports and increase imports, leading to a decrease in both imports and exports due to reduced overall economic activity.

Given Fixed Exchange Rates, Assume Mexico Initiates Contractionary Monetary and Fiscal