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Question
If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries?
Options
Country A has higher inflation than country B. Since the exchange rate is fixed, it is advantageous for country B to export goods to country A.
Similarly, it is advantageous for country A to import goods from country B. On the other hand, it would be expensive for country A to export goods to country B.
Both country A has higher inflation than country B. Since the exchange rate is fixed, it is advantageous for country B to export goods to country A and similarly, it is advantageous for country A to import goods from country B. On the other hand, it would be expensive for country A to export goods to country B.
None of the above
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Solution
Both country A has higher inflation than country B. Since the exchange rate is fixed, it is advantageous for country B to export goods to country A and similarly, it is advantageous for country A to import goods from country B. On the other hand, it would be expensive for country A to export goods to country B.
Explanation:
Inflation in country A is higher than in country B. Because the exchange rate is fixed, exporting goods to nation A benefits country B. Similarly, importing items from nation B is beneficial to country A. Exporting commodities to nation B, on the other hand, would be costly for country A. As a result, country A will have a trade imbalance since it will import more items from country B than it will export. In comparison to exports from country A, country B will import 22. fewer items. As a result, there is a trade surplus in the country.
