Sia
Question
Statistics
Posted 7 months ago
The economies of Maxistan and Ile are open economies.
If Maxistan runs a budget surplus, how will this impact lle in the short run?
Choose 1 answer:
(A) Increases inflation in Ile
(B) Increases the unemployment rate in Ile
(C) Ile's net exports will increase
(D) Ile's currency depreciates
(E) Decreases the demand for financial assets in Ile
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Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
To understand the impact of Maxistan's budget surplus on Ile's economy, we need to consider the basic principles of international trade and finance
step 2
A budget surplus in Maxistan suggests that the government is spending less than it earns, which could lead to a reduction in domestic interest rates
step 3
Lower interest rates in Maxistan could lead to capital outflow as investors seek higher returns elsewhere, potentially increasing the demand for Ile's financial assets
step 4
Increased demand for Ile's financial assets would require investors to purchase Ile's currency, leading to currency appreciation, not depreciation
step 5
Currency appreciation in Ile would make Ile's exports more expensive and imports cheaper, which could lead to a decrease in net exports
Answer
C
Key Concept
Budget surplus and international capital flows
Explanation
A budget surplus can lead to lower interest rates, causing capital to flow to economies with higher returns, affecting currency values and trade balances.
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