Question

If the U.S. is experiencing inflation, then it will be most willing to engage in international policy coordination if coordination requires:

A. weakening the dollar. B. strengthening the dollar. C. expansionary U.S. fiscal policy. D. expansionary U.S. monetary policy.

Answer 1

Correct option is (B).

If dollar is strengthened, US exports will become costlier and imports will become cheaper, therefore US export demand will fall and import demand will rise, decreasing net exports. A fall in net exports will reduce aggregate demand which will decrease price level, lowering inflation rate.

Note that expansionary US fiscal or monetary policy will each boost aggregate demand which will increase price level, further raising inflation rate.