How can rising U.S. inflation rates impact economies in other countries?

• A. By increasing the cost of U.S. exports, making them less affordable for foreign buyers
• B. By causing a decrease in global oil prices
• C. By automatically lowering interest rates in other countries
• D. By reducing the value of foreign currencies relative to the U.S. dollar

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the relationship between U.S. inflation and the price of U.S. exports. When inflation rises in the U.S., the general price level of goods and services increases, including those goods that the U.S. exports to other countries.
2. Step 2: Recognize that higher prices for U.S. exports make these goods more expensive for foreign buyers, potentially reducing demand for U.S. products abroad.
3. Step 3: Consider the impact on exchange rates. Rising U.S. inflation can lead to a stronger U.S. dollar if investors seek higher returns, which can make foreign currencies weaker relative to the dollar.
4. Step 4: Analyze why rising U.S. inflation does not automatically cause a decrease in global oil prices or automatically lower interest rates in other countries. These outcomes depend on other factors such as global supply and demand and central bank policies.
5. Step 5: Conclude that the primary direct impact of rising U.S. inflation on other economies is through increased costs of U.S. exports, making them less affordable for foreign buyers, which can affect trade balances and economic growth in those countries.