8. For this question, assume that equilibrium output is determined in the zZ - Y diagram. Further assume that policy makers' goals are (1) to achieve balanced trade (i.e. NX =0); and (2) to achieve a target level of output, say Y'. Now, suppose that the initial level of equilibrium output is equal to Y' (ie.,Y = Y") and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously? A. a reduction in government spending B. convince the country's trading partners to pursue policies what will cause an increase in foreign income (Y) C. a reduction in taxes D. a simultancous increase in government spending and reduction in the real exchange rate E. none of the above

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8. For this question, assume that equilibrium output is determined in the
ZZ - Y diagram. Further assume that policy makers' goals are
(1) to achieve balanced trade (i.e. NX = 0 ); and
(2) to achieve a target level of output, say Y'.
Now, suppose that the initial level of equilibrium output is equal to Y' (ie.,Y = Y")
l ofo
and that a trade deficit exists at this initial level of output.
Which of the following policy actions would most likely enable the policy makers to
achieve their two goals simultaneously?
A. a reduction in government spending
B. convince the country's trading partners to pursue policies what will cause an
increase in foreign income (Y*)
C. a reduction in taxes
D. a simultaneous increase in government spending and reduction in the real
exchange rate
E. none of the above
Transcribed Image Text:8. For this question, assume that equilibrium output is determined in the ZZ - Y diagram. Further assume that policy makers' goals are (1) to achieve balanced trade (i.e. NX = 0 ); and (2) to achieve a target level of output, say Y'. Now, suppose that the initial level of equilibrium output is equal to Y' (ie.,Y = Y") l ofo and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously? A. a reduction in government spending B. convince the country's trading partners to pursue policies what will cause an increase in foreign income (Y*) C. a reduction in taxes D. a simultaneous increase in government spending and reduction in the real exchange rate E. none of the above
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