How does a country's business cycle generally affect its international trade balance?

• A. During an economic expansion, exports always increase, resulting in a trade surplus.
• B. The business cycle has no impact on a country's international trade balance.
• C. During an economic expansion, imports tend to increase, potentially leading to a trade deficit.
• D. During a recession, imports and exports both increase, improving the trade balance.

Answer: (C)

Verified step by step guidance

1. Understand the concept of the business cycle, which consists of periods of economic expansion and recession, affecting income, consumption, and investment levels in a country.
2. Recognize that during an economic expansion, domestic income rises, leading to increased demand for both domestic and foreign goods, which typically causes imports to increase.
3. Note that while exports may also increase during an expansion due to stronger global demand, the rise in imports often outpaces exports, potentially causing a trade deficit or reducing a trade surplus.
4. During a recession, domestic income falls, reducing demand for imports as consumers and businesses cut back on spending, which can improve the trade balance if exports do not fall as much.
5. Summarize that the business cycle affects the trade balance mainly through changes in income and spending patterns, with expansions tending to increase imports more than exports, and recessions reducing imports, thereby influencing the trade balance accordingly.