Answer to Question #156575 in Macroeconomics for athirah

Question

The balance of payments curve shift to the right if import prices rise. True or false? Explain your answer.

Answer 1

FALSE

When import prices rise, imports fall and thus might lead to a balance of pament surplus. A balance of surplus implies that there would be more demand for domestic currency than foreign currency and that would lead to appreciation of currency. There is an inverse relation between exchange rate and balance of payment, so an appreciation in domestic currency would lead to leftward shift in the balance of payment curve.