If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).
A) increase
B) have no impact on
C) reduce
D) all of the above are equally possible

Question

Quizplus · Accepted Answer

If the home currency appreciates against other currencies, it becomes more expensive for other countries to buy goods and services from the home country. This would lead to a decrease in exports, which are a component of the current account. On the other hand, imports become cheaper for the home country, which would increase imports and also decrease the current account balance. Therefore, a currency appreciation would lead to a reduction in the current account balance.

If the Home Currency Begins to Appreciate Against Other Currencies