Question

1. If a country experiences high inflation relative to the UK, its exports to the UK should _______________, its imports should ___________. Justify your answer (1 point)

1. Decrease, increase
2. Increase, decrease
3. Increase, increase
4. None

Answer 1

Inflation refers to an increase in the prices of goods and services owing to various factors like devaluation of currency. High inflation has a negative impact on a country's exchange rate, i.e, leads of depreciation of currency. Thus, as per the question, if a country experiences high inflation relative to the UK, it means that the country's exchange rate with UK depreciates, meaning one unit of currency can now buy lesser currencies of UK. Thus, the exports shall bring losses in such a case due to reduced receivables and imports will turn profitable.

Thus, ans : exports to the UK should decrease, imports from UK should increase.

option A