Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Current account decreases due to reduced net exports
B
Capital and financial account must increase to offset current account decline
C
Currency value may depreciate due to trade imbalance
D
Overall economic stability is affected by changes in trade relationships
Understanding the Answer
Let's break down why this is correct
Answer
When a country's net exports decrease, it means that it is selling less to other countries than it is buying from them. First, this can lead to a trade deficit, where imports exceed exports. As a result, the country may need to adjust its currency value to make its goods cheaper for foreigners, encouraging exports. For example, if the United States sells fewer cars abroad, it might lower the dollar's value so that its cars become more affordable for foreign buyers. Finally, these adjustments can help restore balance in the payments by making exports more competitive and reducing the trade deficit over time.
Detailed Explanation
When a country sells less to other countries, its current account goes down. Other options are incorrect because Some might think that the capital account will automatically increase to fix the current account; People may believe that a currency will always drop in value when exports fall.
Key Concepts
Balance of Payments Adjustments
Net Exports Impact
Currency Valuation
Topic
Balance of Payments Adjustments
Difficulty
hard level question
Cognitive Level
understand
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