Question

Assume everything else held​ constant, which one of the following statements would be a true statement of the overall economic impact that would result from the Fed performing expansionary monetary​ policy?

Domestic interest rates would​ decrease, the dollar would​ depreciate, the trade deficit would increase and NX would increase.

B.

Domestic interest rates would​ decrease, the dollar would​ apreciate, the trade deficit would decrease and NX would increase.

C.

Domestic interest rates would​ decrease, the dollar would​ depreciate, the trade deficit would decrease and NX would increase.

D.

Domestic interest rates would​ increase, the dollar would​ depreciate, the trade deficit would decrease and NX would increase.

Answer 1

Answer: Option A.

Domestic interest rates would​ decrease, the dollar would​ depreciate, the trade deficit would increase and NX would increase.

Explanation: Expansionary monetary policy is a policy in which the central bank expands the money supply in the economy faster than usual, resulting in lower interest rates in the economy. Central banks do this through open market operations, reserve requirements, or interest rate adjustments in the economy. An increase in the money supply lowers interest rates and increases demand in the economy. This stimulates economic growth. As it devalues the currency, so does the exchange rate in the economy. A weaker exchange rate in an economy makes exports cheaper and imports more expensive, resulting in higher net exports and a lower trade deficit.

"Domestic interest rates would​ decrease, the dollar would​ depreciate, the trade deficit would increase and NX would increase." is correct.