The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:
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

The absorption approach suggests that a decrease in the value of the currency lowers the prices of domestically produced goods, making them more attractive to local consumers. This leads to an increase in domestic absorption and, in turn, a decrease in exports and an increase in imports, resulting in a trade deficit. However, if domestic absorption declines, consumption and investment spending decrease, resulting in lower imports and thus decreasing the trade deficit.

The Absorption Approach Suggests That One of the Following Causes