ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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reduce consumer spending on imported products
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cause an appreciation in the value of the exchange rate
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cause a rise in employment in export industries
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reduce the level of aggregate demand
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Detailed explanation-1: -The net trade balance is measured as the total value of exported goods and services minus the total value of imported products. A trade surplus means that X>M – therefore aggregate demand (AD) will increase. A trade deficit means that M>X – therefore AD will fall.
Detailed explanation-2: -As demand for domestic firms’ products falls, these firms are forced to downsize, resulting in the layoff of domestic workers. Thus it is said that trade deficits cause the loss of domestic jobs.
Detailed explanation-3: -A country running large current account deficit is always at risk of seeing the value of the currency fall. If there is insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds.
Detailed explanation-4: -The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates.