There is a trade-off between the objective of reducing a trade deficit and the objective of reaching full employment because:(A)Net exports rise as income increases(B)As income increases, the trade deficit rises(C)Imports fall as income increases(D)Fiscal policy and monetary policy must be used to achieve the objective
(B) In full employment, people have more money to buy foreign imports, while exports don't change much. This will tend to worsen the deficit. Similarly, trying to reduce the trade deficit by putting up tariff barriers will also reduce exports and income levels, and will also Americans to buy more expensive or (in many cases) less desirable domestic products.
The correct answer to this question is (A) - net exports rise as income increases.
To understand this concept, let's break down each option and explain why (A) is the correct answer.
(A) Net exports rise as income increases:
When a country's income rises, its citizens usually have higher purchasing power, leading to increased spending on both domestically produced goods and imported goods. This increased spending on imports can cause the trade deficit to rise, as imports increase while exports remain constant. Therefore, there is a trade-off between reducing the trade deficit and achieving full employment because increasing income tends to lead to a larger trade deficit.
(B) As income increases, the trade deficit rises:
This option is incorrect because it implies that there is a direct relationship between income and the trade deficit. However, as explained above, higher income levels can lead to increased imports and a larger trade deficit, but this relationship is not a guarantee.
(C) Imports fall as income increases:
This option is incorrect. As income increases, individuals generally have more disposable income to spend, which often leads to increased imports, as people can afford to purchase more goods and services from abroad. Therefore, imports tend to rise or remain constant as income increases, rather than fall.
(D) Fiscal policy and monetary policy must be used to achieve the objective:
This option is incorrect because it does not directly address the trade-off between reducing the trade deficit and achieving full employment. While fiscal and monetary policy tools can be utilized to influence employment levels and trade deficits, this statement does not explain the specific trade-off between these two objectives.
In summary, the trade-off between reducing the trade deficit and reaching full employment arises because net exports tend to rise as income increases, contributing to a larger trade deficit.