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?
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Answer:
we have to decrease the inflation ofcontry Aor we have to increase the inflation in country B
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Explanation:
An important determinant of a country is the exchange rate and plays a vital role in the country’s trade level. If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed. In this case there are following possibilities –
It would be advantageous for Country B to export products to Country A
It would be costly for Country A to export products to Country B where it would be advantageous to import Country B
It would result in imports from Country A and exports from Country B
It would result in trade surplus in Country A and trade deficit in Country B
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