Why Might Expansionary Macroeconomic Fiscal And Monetary Policies Which Stimulate The Domestic Economy Cause A Trade Deficit?
Yes you are right! An expansionary fiscal and monetary policy increases the trade deficits. On the other hand, a contradictory policy can decrease the trade deficit. The reason is that, under this policy, interest rates are decreased to increase the money supply in the economy. With decrease in interest rate people will not be wiling to keep their money and they will invest. The value of currency will go down in the international market. As a result the demand for the cheap products of the country will increase and (X-I) will increase. Which shows that there will be an increase in exports and decrease in import. However, a trade deficit is calculated as Imports minus exports (I – X), therefore, trade deficit will increase.
