Chapter 2 questions - Chapter 2 questions 2 a How would a...

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12 Chapter 2 questions a. How would a relatively high home inflation rate affect the home country’s current account, other things being equal? A relatively high inflation rate would make the current account increase. That is because consumers and corporations in that country will be less likely to purchase more goods overseas…which is due to high local inflation…while the country’s exports to other countries will decline. (page 39). A high inflation rate tends to increase imports and decrease exports, thereby increasing the current account deficit, other things equal b. Is a negative current account harmful to a country? Discuss. A negative current account balance is obtained by the country spending more on trade, income, and transfer payments then it received. Having a negative current balance doesn’t necessarily mean a country is in trouble. It just means that the cash inflows (exports and income receipts) were less than the cash outflows (imports and income payments and net transfers). (page 28). A negative current account is thought to reflect lost jobs in a country, which is unfavorable.
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This note was uploaded on 05/18/2010 for the course FIN 540 taught by Professor Dow during the Spring '10 term at Southeast University, China.

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Chapter 2 questions - Chapter 2 questions 2 a How would a...

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