Question

If a U.S. firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S.​ stocks, the U.S. trade balance​ ________ and the U.S. financial account​ ________.

A. Improves; improves.
B. Worsens; improves.
C. Improves; worsens.
D. Worsens; worsens.

Answer 1

When a U.S. firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S. stocks, the U.S. trade balance worsens and the U.S. financial account improves. Correct option is B.

Step-by-step explanation:

When a U.S. firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S. stocks, the U.S. trade balance worsens and the U.S. financial account improves. This is because the U.S. trade balance is the difference between the value of exports and imports, and buying tulips from a Dutch firm increases imports. On the other hand, the U.S. financial account, which measures the flow of financial assets into and out of the country, improves when the Dutch firm uses the dollars to buy U.S. stocks.