Author Question: Can a country have a trade deficit forever? What will be an ideal ... (Read 76 times)

Jramos095 · **on:** Jun 30, 2018

Can a country have a trade deficit forever?

What will be an ideal response?

Question 2

In most cases, expenditure-switching policies must be accompanied by expenditure-reducing policies because

A) expenditure-switching policies are completely ineffective without expenditure-reducing policies.
B) inflation ensues as home country domestic expenditures switch away from foreign goods to domestic goods unless overall expenditures are reduced.
C) inflation abroad may increase the demand for domestic goods, causing inflation to rise.
D) the depreciation in the exchange rate may decrease the domestic price of foreign goods, causing an increase in the current account deficit.
E) None of the above.

mathjasmine · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Countries whose imports exceed exports are said to run trade deficits. Countries cannot run trade deficits forever, just like individuals cannot borrow indefinitely. This is illustrated by the fact that the revenue earned from selling exports is the primary means for purchasing imports. Thus, in some years countries will have to export more then they import to repay for their past debts.

Answer to Question 2

B