a) Suppose Portugal and England are close trading partners, where Portugal sells wine to England and buys textiles in exchange. The resulting trade balance of Portugal is in a deficit. How would the “price-specie-flow mechanism” would move these countries towards a balance? Make sure you explain the mechanism in your own words. b) Explain which of these countries might experience a high inflation rate during the adjustment. c) How does your answer to part b change if England’s central bank sterilizes the capital flows?

a) Suppose Portugal and England are close trading partners, where Portugal sells wine to England and buys textiles in exchange. The resulting trade balance of Portugal is in a deficit. How would the “price-specie-flow mechanism” would move these countries towards a balance? Make sure you explain the mechanism in your own words. b) Explain which of these countries might experience a high inflation rate during the adjustment. c) How does your answer to part b change if England’s central bank sterilizes the capital flows?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter6: Managing In The Global Economy

Section: Chapter Questions

Problem 5E

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5 a) Suppose Portugal and England are close trading partners, where Portugal sells wine to England and buys textiles in exchange. The resulting trade balance of Portugal is in a deficit. How would the “price-specie-flow mechanism” would move these countries towards a balance? Make sure you explain the mechanism in your own words. b) Explain which of these countries might experience a high inflation rate during the adjustment. c) How does your answer to part b change if England’s central bank sterilizes the capital flows?

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