When a nation's currency is different from equilibrium, it is either overvalued or undervalued. To restore equilibrium, either a ____ or ____ must occur.
A) return to a balanced budget; more government belt-tightening
B) nominal exchange rate change; a change in the nation's price level
C) national cut of imports; a national increase of exports
D) national cut of exports; a national increase of imports

Question

Quizplus · Accepted Answer

The only way to restore equilibrium when a nation's currency is different from equilibrium is through a change in the nominal exchange rate or a change in the nation's price level. This would cause the currency to either depreciate or appreciate, restoring equilibrium. Choices A, C, and D do not directly address the currency value and would not necessarily restore equilibrium.

When a Nation's Currency Is Different from Equilibrium, It Is