Under adjustable pegged exchange rates, what happens if U.S. inflation surpasses that of its trading partners ?
Show answer Hide answer
Answer: B. U.S imports tend to rise, and exports tend to fall
Explanation
Higher domestic inflation makes domestic goods expensive, increasing imports and reducing exports. Adjustable pegged exchange rates maintain fixed parities until persistent trade deficits force devaluation. Inflation differentials erode international competitiveness over time under fixed exchange rate regimes. Pegged exchange rate systems require central banks to intervene to maintain official currency values. Persistent inflation divergence leads to overvalued domestic currencies and dwindling reserves. Export volumes decline when domestic production costs rise faster than foreign competitor prices.
Central banks monitor trade balances to determine when currency pegs require formal adjustment. Fixed exchange rate regimes can collapse if domestic inflation outpaces trading partners consistently. Policymakers use monetary tightening to combat inflation and defend existing exchange rate pegs. U.S. exports rise and imports fall describes the outcome of lower domestic inflation rates. U.S. foreign exchange reserves tend to rise occurs when a country runs persistent trade surpluses. U.S. foreign exchange reserves remain constant ignores the draining effect of inflation-driven deficits.
Related questions
Q1. What is the outcome in the U.S. under floating exchange rates from relatively high productivity and low inflation ?
Show answer Hide answer
Answer: B. increase in the demand for foreign currency an increase in the supply of foreign currency and a appreciation in the dollar
High productivity and low inflation strengthen currency value, increasing foreign currency supply and appreciation. Stronger domestic purchasing power attracts foreign investment while making exports competitive. Floatin...
Q2. Under free trade, when would Canada fail to gain from trade with Sweden ?
Show answer Hide answer
Answer: A. Trades at Canada’s marginal rate of transformation
Trading at a country own marginal rate of transformation captures zero trade gains. All international trade gains accrue entirely to the trading partner under this condition. Mutually beneficial trade requires terms of t...
Q3. How did Soviet-type economy-wide central planning operate ?
Show answer Hide answer
Answer: A. most resource lack freedom to move to their highest value uses
Central planning bureaus dictate production targets, restricting resources from moving freely to valued uses. Bureaucratic administrative controls replace market price signals in allocating land, labor, and capital. This...
Q4. What are two major drivers of economic growth ?
Show answer Hide answer
Answer: A. resources and efficiency
Economic growth relies fundamentally on expanding available resources and improving productive efficiency. Accumulating physical capital, human capital, and natural resources increases total production capacity. Efficien...
Q5. Under which conditions would you prefer to be a borrower ?
Show answer Hide answer
Answer: B. The nominal rate of interest is 20 percent and the inflation rate is 25 percent
Borrowers benefit when inflation outpaces nominal interest rates during loan repayment periods. A 20 percent nominal rate with 25 percent inflation yields a negative real interest rate. Negative real rates mean loans are...
Q6. What occurs under financial repression ?
Show answer Hide answer
Answer: A. I and II only
Financial repression encompasses government controls over interest rates and directed credit allocation. Interest rate ceilings create negative real returns for savers within repressed financial systems. Governments use...