When a temporary adverse supply shock hits a small open economy,it causes the current account to ________ and investment to ________.
A)fall;fall
B)rise;remain unchanged
C)fall;remain unchanged
D)rise;fall

Question

Quizplus · Accepted Answer

When a temporary adverse supply shock hits a small open economy, it causes a decrease in the supply of goods, which leads to an increase in prices. This increase in prices makes exports more expensive, and imports cheaper, which causes a fall in the current account. Additionally, the increase in prices causes a decrease in investment, as firms are less willing to invest due to the uncertainty and higher costs of goods. Therefore, the best choice is C, where the current account falls and investment remains unchanged. Neither A nor D makes sense, as they have the same response for both variables, which contradicts the explanation above. Option B is also incorrect, as the shock impacts the economy negatively, making investment more unlikely, to remain unchanged is unlikely.

When a Temporary Adverse Supply Shock Hits a Small Open