Relative Unemployment and Trade Imbalance

Steps:

• Current account deficit measures net exports (exports minus imports) plus net income; a larger deficit indicates falling exports or rising imports.
• Unemployment rise signals reduced domestic output and income.
• Faster domestic unemployment growth versus trading partners means relatively weaker domestic production.
• This increases import reliance to sustain consumption while exports stagnate due to competitive disadvantage.

Why B is correct:

• Higher relative domestic unemployment reduces output faster than abroad, boosting imports (to fill supply gaps) without proportional export gains, per open-economy output gap theory.

Why the others are wrong:

• A: Increased demand for domestic goods would boost exports or reduce imports, shrinking the deficit.
• C: Faster domestic inflation erodes export competitiveness but is offset by cheaper imports; net effect often improves terms of trade, not worsening deficit.
• D: Exchange rate depreciation makes exports cheaper and imports costlier, typically reducing the deficit.

Final answer: B