Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
QE could weaken the national currency, making exports cheaper and imports more expensive, potentially improving the trade balance.
B
QE will strengthen the national currency, leading to higher export prices and lower import costs, which will worsen the trade balance.
C
QE has no impact on the exchange rate, so it does not affect the trade balance.
D
QE will cause interest rates to rise, strengthening the currency and improving the trade balance.
Understanding the Answer
Let's break down why this is correct
Answer
When a country uses quantitative easing during a liquidity trap, it pumps more money into the economy by buying government bonds, which raises the money supply and lowers interest rates. Lower rates make the currency less attractive to foreign investors, so the national currency tends to weaken or depreciate. A weaker currency makes a country's exports cheaper and imports more expensive, so the trade balance usually improves as exports rise and imports fall. For example, if the U. S.
Detailed Explanation
When a central bank does QE, it buys government bonds and puts more cash into the economy. Other options are incorrect because Many think QE strengthens the currency by raising interest rates, but QE actually lowers rates; Some say QE has no exchange‑rate effect, but the extra money it injects changes supply and demand for the currency.
Key Concepts
Liquidity Trap
Exchange Rate Implications
Quantitative Easing (QE)
Topic
Expansionary Monetary Policy Effects
Difficulty
hard level question
Cognitive Level
understand
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