Which of the following is correct?
A) Contractionary fiscal and monetary policies both increase the interest rate, appreciate the domestic currency, and increase the trade deficit.
B) Contractionary fiscal policy reduces the interest rate, depreciates domestic currency, and reduces the trade deficit; contractionary monetary policy does the opposite.
C) Contractionary monetary policy reduces the interest rate, depreciates domestic currency, and reduces the trade deficit; contractionary fiscal policy does the opposite.
D) Only contractionary monetary policy has any effect on international variables.
E) Only contractionary fiscal policy has any effect on international variables.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy reduces aggregate demand, which leads to a decrease in the interest rate. This, in turn, leads to a depreciation of the domestic currency and a decrease in the trade deficit. Contractionary monetary policy, on the other hand, increases the interest rate, appreciates the domestic currency, and increases the trade deficit.

Which of the Following Is Correct