If Slovenia were a large country in world trade,then if it instituted a large set of subsidies for its exports,this must
A) harm its terms of trade.
B) have no effect on its terms of trade.
C) improve its terms of trade.
D) decrease its marginal propensity to consume.
E) harm world terms of trade.

Question

Quizplus · Accepted Answer

When a country institutes subsidies for its exports, it makes its exports cheaper for foreign buyers, which increases demand for its exports. As a result, the demand for the country's currency also increases, which raises the exchange rate of the currency. This increase in the currency's value makes the country's imports cheaper, while making its exports more expensive for foreign buyers. This leads to a decrease in the terms of trade, as the country needs to export more goods to pay for the same level of imports. Therefore, implementing subsidies for exports would harm Slovenia's terms of trade.

If Slovenia Were a Large Country in World Trade,then If