Question

a country has a higher inflation rate than all other countries, and it has slowe economic growth. the central bank does not intervene in the foreign exchange market. how does the exchange rate change to preserve purchasing power parity? if investment from foreigners decreases due to the slow economic growth, is the current account balance is becoming more positive or more negative? to preserve purchasing power parity, the exchange rate if investment from foreigners decreases due to the slow economic growth, the current account balance is becoming more a. falls, positive b. rises, negative oc. rises, positive od. falls, negative is the exchange macro

Answer 1

To preserve purchasing power parity in a country with higher inflation and slower economic growth, the exchange rate adjusts by falling, leading to a more positive current account balance if foreign investment decreases.

Therefore the correct answer is option a falls, positive.

Step-by-step explanation:

When a country with a higher inflation rate than other countries experiences slow economic growth and the central bank does not intervene in the foreign exchange market, the exchange rate will adjust to preserve purchasing power parity (PPP). The currency of the country with higher inflation and slow economic growth will likely depreciate, meaning the exchange rate will fall. This adjustment helps ensure that prices of internationally tradable goods, when converted to a common currency, are similar across economies.

If foreign investment decreases because of the country's slow economic growth, the current account balance might change. A decrease in foreign investment generally leads to a higher current account balance, making it more positive, since there is less outflow of currency to pay for investments. Therefore, to maintain purchasing power parity, the exchange rate falls and the current account balance becomes more positive (Option A).