For this question, assume that equilibrium output is determined ...

[karateprodigy]

For this question, assume that equilibrium output is determined in the ZZ-Y diagram. Further assume that policy makers' goals are (1 ) to achieve balanced trade (i.e., NX = 0); and (2 ) to achieve a target level of output, say YT. Now, suppose that the initial level of equilibrium output is equal to YT (i.e., Y = YT) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?
 
  A) a reduction in government spending
  B) convince the country's trading partners to pursue policies that will cause an increase in foreign income (Y)
  C) a reduction in the real exchange rate
  D) a reduction in taxes
  E) a simultaneous increase in government spending and reduction in the real exchange rate
  F) none of the above

Question 2

As fiscal consolidation takes place, the central bank should
 
  A) decrease the policy rate.
  B) increase the policy rate.
  C) increase inflation rate.
  D) decrease money supply.

[ebenov]

Answer to Question 1

B

Answer to Question 2

A