Suppose that a country has a current account deficit and a problem with inflation. A consistent policy mix in this case would be a(n) _____ fiscal policy coupled with a(n) _____ monetary policy.
A) expansionary, expansionary
B) expansionary, contractionary
C) contractionary, constant
D) contractionary, contractionary
E) constant, contractionary

Question

Quizplus · Accepted Answer

A contractionary fiscal policy, which involves reducing government spending and/or increasing taxes, can help reduce a current account deficit by decreasing domestic demand and imports. A contractionary monetary policy, which involves increasing interest rates, can help combat inflation by reducing borrowing and spending. Together, these policies are consistent with addressing both issues.

Suppose That a Country Has a Current Account Deficit and a Problem