In the Short Run, a Trade Deficit Allows More Consumption

question 2

Multiple Choice

In the short run, a trade deficit allows more consumption, but in the long run, a trade deficit is a problem because:

• A)the country eventually will consume more and produce less.
• B)the country eventually will sell all its financial assets to foreigners.
• C)the domestic currency will appreciate.
• D)the country eventually has to produce more than it consumes in order to pay foreigners their profits.

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Definitions:

Return on Investment

A measure of performance that evaluates the efficiency or profitability of an investment relative to its cost.

Selling Price

The amount of money a buyer pays to purchase a product or service.

Absorption Costing

An accounting method that includes both variable and fixed manufacturing overhead costs in the cost of a product.

Cost-plus Pricing

A pricing strategy where the selling price is determined by adding a specific markup to a product's cost.