Question

When a temporary adverse supply shock hits a large open economy, it causes the current account...

When a temporary adverse supply shock hits a large open economy, it causes the current account to ________ and investment to ________.

Answer: A, but i have no idea why the investment falls. can anyone explain in detail ? ( not in the form of your handwriting, i may not recognize it)

A) fall; fall

B) rise; remain unchanged

C) fall; remain unchanged

D) rise; fall

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Homework Answers

Answer #1

Option A

Fall; Fall

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An adverse supply shock decreases supply and shifts SRAS curve to the left which increases price level and decreases actual real GDP in the economy.

The increased price level decreases export in the economy which causes to decrease current account as a current account is the balance of trade and transfers.

The decreased production and higher prices decrease investment as the which is an upward movement along the AD curve.

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