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    Question

    The US Federal Reserve has announced an increase in

    interest rates to combat rising inflation. This has led to an appreciation of the US dollar against other major currencies. What is the likely impact of the US dollar appreciation on the current account balance of the United States?
    A The current account balance will improve (move towards a surplus). Correct Answer Incorrect Answer
    B The current account balance will worsen (move towards a deficit). Correct Answer Incorrect Answer
    C There will be no impact on the current account balance. Correct Answer Incorrect Answer
    D The impact on the current account balance is uncertain. Correct Answer Incorrect Answer
    E The current account balance will fluctuate randomly. Correct Answer Incorrect Answer

    Solution

    When the US dollar appreciates, US exports become more expensive for foreign buyers, and imports become cheaper for US consumers. This leads to a decrease in exports and an increase in imports, worsening the current account balance.

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