Suppose foreigners find u. s. goods and services more desirable for some reason other than a change in the exchange rate. which policies could be used to offset the resulting change in output? a. a decrease in the money supply and a decrease in government purchases. b. a decrease in the money supply and an increase in government purchases. c. an increase in the money supply and a decrease in government purchases. d. an increase in the money supply and an increase in government purchases.

The correct answer is option a.

Explanation:

If foreigners find US  goods and services more desirable, they will demand more of these goods and services. The price level will increase. The domestic firms will start producing more to earn higher revenue and profits. The output level will increase.

To offset this increase in output the government will decrease money supply in the economy. To do so the government can adopt several measures. Government can adopt contractionary monetary or fiscal policy. Government can reduce money supply by reducing purchases.

Option (a) is correct.

Explanation:

Correct Option:  A decrease in the money supply and a decrease in government purchases.

If US goods and services are more desirable for foreigners then the exports of united states increases. Therefore, the earnings from the exports increases and hence, there will be more money in the market which increases the money supply in an economy.

So, the fed uses the Contractionary monetary policy and fiscal policy to offset the resulting change in output.

∴ Contractionary monetary policy will results in decrease in the money supply and Contractionary fiscal policy will results in decrease in government purchases.

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