PRC-3 · Chapter 20 · Question 22 of 30
If a country's government utilizes highly Expansionary Fiscal Policy (massive spending and tax cuts) during a boom, what is the most likely negative impact on its Balance of Payments?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It will move towards a severe deficit as consumers spend their new income on imported goods
Explanation
Expansionary policy boosts consumer income. Because of the marginal propensity to import, citizens will buy more foreign goods, worsening the current account deficit.
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