Which of these is likely to occur when contractionary policy is implemented under a fixed exchange rate system?
A) Net transfers rise.
B) The capital account becomes positive.
C) The trade balance worsens.
D) Imports drop and exports rise.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, contractionary policy typically leads to a decrease in domestic demand, which reduces imports and can make domestic goods relatively cheaper for foreigners, potentially increasing exports. This can improve the trade balance.

Which of These Is Likely to Occur When Contractionary Policy