You have just read in the newspaper that a hurricane has destroyed Guatemala's coffee crop for this year.Guatemala is a small open economy.Based on this information alone,you would expect that
A)desired investment would fall in Guatemala.
B)desired investment would increase in Guatemala.
C)net foreign lending by Guatemala would increase.
D)net foreign lending by Guatemala would decrease.

Question

Quizplus · Accepted Answer

The hurricane has severely damaged Guatemala's coffee crop, which is one of its major export products. As a result, the country's export revenues will decrease, leading to a decrease in foreign exchange earnings. This will cause a balance of payments deficit, making it difficult for Guatemala to meet its external financial obligations. To finance this deficit, Guatemala would require net foreign lending, which would increase its external debt. Therefore, net foreign lending by Guatemala would decrease as a result of the hurricane's impact on its economy. Choices A and B are not correct because there is no information provided to suggest the impact of the hurricane on desired investment. Choice C is also not appropriate because the decrease in export earnings would lead to a need for external borrowing, rather than lending.

You Have Just Read in the Newspaper That a Hurricane