Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 6. Open Economy Macroeconomics

Subject: Social Science - Class 12th

Q. No. 16 of Exercises

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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?

It is given that –

Country A has high inflation than country B

The exchange rate is fixed

In this case there are following possibilities –

It is advantageous for country B to export goods to country A

It will be expensive for country A to export goods to country B where as it will be advantageous to import form country B

So this will give rise to imports of country A and exports of country B

It will lead to trade surplus in country A and trade deficit in country B


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