Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases exports leading to a higher current account deficit.
B
It increases exports leading to an improvement in the current account balance.
C
It has no effect on exports or imports, thus leaving the current account unchanged.
D
It increases imports leading to a lower current account balance.
Understanding the Answer
Let's break down why this is correct
Answer
When a country's currency depreciates, it means that its money is worth less compared to other currencies. This change makes exports cheaper for other countries, which can lead to an increase in sales of goods and services abroad. For example, if a toy made in the United States costs $10, and the dollar depreciates, that toy might only cost 8 euros instead of 10 euros to a buyer in Europe, encouraging more purchases. On the other hand, imports become more expensive for the domestic consumers, which may lead to a decrease in the quantity of foreign goods they buy. Overall, a depreciation usually improves the current account balance by boosting exports and reducing imports.
Detailed Explanation
When a country's currency loses value, its goods become cheaper for other countries. Other options are incorrect because This answer suggests that cheaper goods lead to fewer exports; This option claims that currency changes have no effect.
Key Concepts
Current account
exchange rates
Topic
Current Account Balance Dynamics
Difficulty
medium level question
Cognitive Level
understand
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