Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased government spending leads to higher GDP, attracting foreign investment and appreciating the currency.
B
A decrease in import tariffs results in a higher trade deficit, thereby depreciating the currency.
C
Reducing taxes on exports increases domestic production, improving the trade balance and appreciating the currency.
D
Heightened government borrowing raises interest rates, leading to a capital inflow and currency appreciation.
Understanding the Answer
Let's break down why this is correct
Answer
A government's fiscal policy involves how it spends money and collects taxes, which can affect the economy and the value of its currency. When a government increases spending, it can boost economic growth, leading to higher demand for goods and services. This demand can encourage exports, as other countries will want to buy more from the growing economy. For example, if a country invests heavily in technology, its innovative products may attract international buyers, improving the trade balance. As exports increase, the demand for the country’s currency rises, leading to currency appreciation.
Detailed Explanation
When the government reduces taxes on exports, companies can sell more goods abroad. Other options are incorrect because Some might think that just spending more money helps the economy; People may believe that lowering import taxes is always good.
Key Concepts
Trade balance
Fiscal policy
Exchange rate mechanisms
Topic
Currency Appreciation Mechanisms
Difficulty
hard level question
Cognitive Level
understand
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