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Question
Suppose, Country X, has more inflation than Country Y. Which of the following is most likely situation to happen in such a case, assuming other factors being constant?
Options
A surplus trade balance in Country X
A deficit trade balance for Country X
A rise in exports from Country X to Country Y
A deficit trade balance for Country Y
Solution
A deficit trade balance for Country X.
Explanation:
In country X, inflation indicates increasing manufacturing costs, which leads to higher pricing. As a result, exports become more expensive while imports become less expensive. It will result in a decrease in exports and an increase in imports. If a country's exports are less than its imports, the country will have a trade deficit.
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