Maka's Bouncing Ball Company is deciding whether to manufacture balls in its home country of Econia or in the neighboring country of Macroland. Maka expects the central bank of Econia to adopt a tight money policy over the next few years. Because of this expectation, Maka's would be more likely to produce in ______ because:
A) Macroland; Econia's currency is likely to appreciate.
B) Macroland; Econia's currency is likely to depreciate.
C) Econia; Econia is more likely to experience rising prices.
D) Econia; Econia is more likely to experience strong growth.

Question

Quizplus · Accepted Answer

A tight money policy typically leads to higher interest rates, which can attract foreign capital, leading to an appreciation of the home country's currency. In this case, if Econia's currency appreciates, it could make exporting more difficult and imports cheaper, which might incentivize Maka's to produce in Macroland where the currency might be weaker in comparison.

Maka's Bouncing Ball Company Is Deciding Whether to Manufacture Balls