The TB (i.e., X- M) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?
a. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.
b. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.
c. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.
d. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.
Ans: d. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.
You might also like to view...
Explain when a country would face a balance of payments deficit and when it would face a balance of payments surplus if it was operating under a fixed exchange rate system
What will be an ideal response?
If a union limits its size to the number of employed members it had when the union was first formed, over time there will be
A) an increase in the supply of union labor. B) falling wages as demand for workers increases. C) rising wages as demand for workers increases and the supply increases proportionally. D) rising wages as demand for workers increases but some potential workers are denied a place in the union.