Under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners ?
Correct answer: B. U.S imports tend to rise, and exports tend to fall
- A. U.S exports tend to rise, and imports tend to fall
- B. U.S imports tend to rise, and exports tend to fall
- C. U.S foreign exchange reserves tend to rise
- D. U.S foreign exchange reserves remain constant
Explanation
Higher U.S. inflation makes U.S. goods relatively more expensive and foreign goods relatively cheaper. Therefore, U.S. imports tend to rise while exports tend to fall, creating downward pressure on the dollar.
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