If a country experiences high inflation relative to the United States, its exports to the United States 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 United States, its exports become more expensive and less competitive, so they should decrease. On the other hand, its imports from the United States become relatively cheaper, so they should increase. As a result, there is downward pressure on its currency's equilibrium value because the increased supply of the country's currency will decrease its value relative to the dollar. Choice D correctly reflects this relationship.

If a Country Experiences High Inflation Relative to the United