Question

A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.

Answer 1

Answer:

The correct answer is: decrease; decrease.

Explanation:

A high inflation rate in the home country as compared to other countries implies that the price level will be relatively higher. This will cause the export demand to decrease and import demand to increase as the foreign goods will be cheaper than the domestic goods.  

This increase in imports and a decrease in exports will cause the current account balance to decrease.  

An increase in income will cause the demand to increase. A shift in the demand curve will cause the price level to increase. An increase in the price level will decrease the current account balance as mentioned above.