According to the Absorption approach, after a currency depreciation, which of the following causes a trade deficit to decrease?
A) a decline in domestic interest rates
B) a rise in domestic imports
C) a rise in government spending
D) a decline in domestic absorption

Question

Quizplus · Accepted Answer

According to the Absorption approach, after a currency depreciation, a decline in domestic absorption (which is the sum of domestic consumption, investment, and government spending) will cause a decrease in the trade deficit. This is because a decrease in absorption means less demand for imports, which in turn leads to a decrease in the trade deficit. Therefore, the correct answer is D.

According to the Absorption Approach, After a Currency Depreciation, Which