A depreciation of the currency can switch spending away from foreign goods and reduce the effect of rising incomes on the current account.

Question

Quizplus · Accepted Answer

A depreciation of the currency makes foreign goods relatively more expensive, leading consumers to switch to domestic goods, which can reduce the current account deficit. Additionally, with a weaker currency, exports may become more competitive, thus increasing demand for domestic goods and services in foreign markets, further reducing the current account deficit. Therefore, a depreciation of the currency can reduce the impact of rising incomes on the current account.

A Depreciation of the Currency Can Switch Spending Away from Foreign