What have we assumed when we conclude that a real depreciation of the currency improves the current account?
A) The volume effect outweighs the value effect.
B) The value effect outweighs the volume effect.
C) All else equal and the volume effect outweighs the value effect.
D) All else equal and the value effect outweighs the volume effect.
E) All else equal and the volume effect equals the value effect.

Question

Quizplus · Accepted Answer

We assume that the volume effect (increase in export volume and decrease in import volume due to cheaper currency) outweighs the value effect (change in the price of exports and imports), leading to an improvement in the current account.

What Have We Assumed When We Conclude That a Real