For an economy suffering from high inflation and a large external deficit,the standard prescription for stabilization entails fiscal:
A) austerity to reduce demand and an appreciation of the exchange rate.
B) austerity to reduce demand and a real appreciation.
C) stimulus to expand supply and a real devaluation.
D) stimulus to expand supply and a real appreciation.

Question

Quizplus · Accepted Answer

Fiscal austerity reduces demand, which helps to reduce inflation. An appreciation of the exchange rate makes imports cheaper, which also helps to reduce inflation.

For an Economy Suffering from High Inflation and a Large