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Question & Answer
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QE could weaken the national currency, making exports cheaper and imports more expensive, potentially improving the trade balance.
QE will strengthen the national currency, leading to higher export prices and lower import costs, which will worsen the trade balance.
QE has no impact on the exchange rate, so it does not affect the trade balance.
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
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
Expansionary Monetary Policy Effects
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Deep Dive: Expansionary Monetary Policy Effects
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Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
Topic Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
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