Question

Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:

a. Inflation to become more severe--surplus to become less severe
b. Inflation to become less severe-surplus to become less severe
c. Inflation to become less severe--surplus to become more severe
d. Inflation to become more severe--surplus to become more severe

Answer 1

If the United States were to revalue the dollar in the face of domestic inflation and a current account surplus, one would expect c. inflation to become less severe and the surplus to become more severe.

Step-by-step explanation:

A lower U.S. dollar would stimulate aggregate demand by making exports cheaper and imports more expensive. It would mean higher prices for imported inputs throughout the economy, shifting the short-term aggregate supply curve to the left. The result could be a burst of inflation and, if the Federal Reserve were to run a tight monetary policy to reduce the inflation, it could also lead to recession.

If the United States were to revalue the dollar in the face of domestic inflation and a current account surplus, one would expect the inflation to become less severe and the surplus to become more severe. The revaluation of the dollar would increase the value of the currency, making imports cheaper and exports relatively more expensive. This would help reduce domestic inflation and stimulate further exports, leading to a larger current account surplus.