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A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without changing the level of domestic output.
- a)True
- b)False
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
A decrease in government spending and a real depreciation is the right...
A real depreciation improves the trade balance since it makes foreign goods more expensive relative to domestic goods, leading to an increase in net exports. But such an increase in net exports implies an increase in domestic output. The government can then decrease its spending to offset the resulting increase in output.
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A decrease in government spending and a real depreciation is the right...
Explanation:
Government Spending:
- A decrease in government spending leads to lower demand in the economy, which can help reduce imports as consumers spend less on foreign goods.
- This reduction in government spending can also lead to lower budget deficits, which can have a positive effect on the overall economy.
Real Depreciation:
- Real depreciation refers to a decrease in the value of a country's currency relative to other currencies, making exports cheaper and imports more expensive.
- This can lead to an increase in exports as foreign consumers find the country's goods more affordable, while domestic consumers may opt for locally produced goods due to the higher cost of imports.
Improving Trade Balance:
- The combination of decreased government spending and real depreciation can help improve the trade balance by reducing imports and increasing exports.
- This can lead to a surplus in the trade balance, as the value of exports exceeds the value of imports.
Without Changing Domestic Output:
- By implementing these policies, the trade balance can improve without affecting the level of domestic output.
- This means that the economy can continue to produce goods and services at the same level, while also benefiting from a stronger trade balance.
Therefore, the statement that a decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without changing the level of domestic output is true.
Government Spending:
- A decrease in government spending leads to lower demand in the economy, which can help reduce imports as consumers spend less on foreign goods.
- This reduction in government spending can also lead to lower budget deficits, which can have a positive effect on the overall economy.
Real Depreciation:
- Real depreciation refers to a decrease in the value of a country's currency relative to other currencies, making exports cheaper and imports more expensive.
- This can lead to an increase in exports as foreign consumers find the country's goods more affordable, while domestic consumers may opt for locally produced goods due to the higher cost of imports.
Improving Trade Balance:
- The combination of decreased government spending and real depreciation can help improve the trade balance by reducing imports and increasing exports.
- This can lead to a surplus in the trade balance, as the value of exports exceeds the value of imports.
Without Changing Domestic Output:
- By implementing these policies, the trade balance can improve without affecting the level of domestic output.
- This means that the economy can continue to produce goods and services at the same level, while also benefiting from a stronger trade balance.
Therefore, the statement that a decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without changing the level of domestic output is true.
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A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without changing the level of domestic output.a)Trueb)FalseCorrect answer is option 'A'. Can you explain this answer?
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