If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.
A) decrease; increase; upward
B) decrease; decrease; upward
C) increase; decrease; downward
D) decrease; increase; downward
E) increase; decrease; upward

Question

Quizplus · Accepted Answer

If a country experiences high inflation relative to the U.S., its exports become more expensive and less competitive, so they should decrease. At the same time, its imports become relatively cheaper, so they should increase. Also, high inflation signals a decrease in demand for the country's currency, which puts downward pressure on its currency's equilibrium value. Therefore, the correct answer is D: exports to the U.S. should decrease; imports from the U.S. should increase; and there is downward pressure on its currency's equilibrium value.

If a Country Experiences High Inflation Relative to the U