Other fundamental things equal, a decrease in the exchange rate value of domestic currency will cause the current account to:
A)fluctuate initially.
B)equal the official settlements balance.
C)move toward a surplus.
D)move toward a long-run deficit.

Question

Quizplus · Accepted Answer

A decrease in the exchange rate value of domestic currency makes the country's exports cheaper and imports relatively more expensive. This makes domestic goods more competitive in the international market, leading to an increase in exports and decrease in imports, which ultimately leads to a surplus on the current account, as more foreign currency flows into the country. Therefore, the current account will move toward a surplus.

Other Fundamental Things Equal, a Decrease in the Exchange Rate