Large amounts of dollar-denominated assets

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Reference no: EM13774083

As of 2006, the United States is running a large trade deficit--that is, imports exceed exports by a wide margin and the United States is consuming more than it is producing. The U.S.'s ability to consume more than it produces rests on foreigners' willingness to purchase U.S. assets. Which of the following could happen if foreigners stopped buying large amounts of dollar-denominated assets?

I. The dollar exchange rate would increase.

II. In the long run, the trade deficit would decline.

III. In the short run, import prices and inflation would increase.

A. I and II only

B. I and III only

C. I, II, III and IV

D. II and III only

Explain.

Reference no: EM13774083

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