“Many countries peg their own currencies to the greenback; these countries import U.S. inflation when the Fed makes a mistake.” Why would these countries “import” inflation.


A. this is incorrect because countries only import goods or services


B. this is correct because a fixed exchange rate means that your country must experience the inflation of the country to which your exchange rate is fixed


C. this is incorrect because inflation is determined by your country’s own money growth rate


D. this is correct because higher inflation in the U.S. will increase your imports and decrease your exports, creating a balance of payments deficit and so inflation

C. If you cheated in my class, I know who are.

The correct answer is D. This is correct because higher inflation in the U.S. will increase imports of goods and services from other countries, including those countries that peg their currencies to the U.S. dollar. When a country's currency is pegged to the U.S. dollar, its exchange rate is fixed, which means that its currency will strengthen or weaken in line with the value of the U.S. dollar.

When the U.S. experiences higher inflation, the prices of goods and services in the U.S. increase. As a result, imports become more expensive, leading to an increase in the cost of living in the countries that import from the U.S. Additionally, higher U.S. inflation can decrease the competitiveness of exports from countries with pegged currencies, leading to a decrease in exports and a balance of payments deficit. This deficit can put pressure on the country's currency and potentially lead to inflation.

So, in summary, countries that peg their currencies to the U.S. dollar may "import" inflation when the U.S. experiences higher inflation because it increases the prices of imported goods, decreases export competitiveness, and can lead to a balance of payments deficit and inflation in those countries.