Let the United States endure a 10 percent rate of inflation during some year when the rest of the world sees only a 5 percent rate. Assuming that the United States were in trade balance at the beginning of the year, maintaining a fixed exchange rate across the world, in this case, would

Question

Quizplus · Accepted Answer

With a higher inflation rate in the United States compared to the rest of the world, American goods become relatively more expensive. This would likely reduce exports and increase imports, leading to a negative trade balance if the exchange rate remains fixed.

Let the United States Endure a 10 Percent Rate of Inflation