Other things being equal, which of the following is a necessary consequence of a depreciation of the U.S. dollar against other currencies?
A) The terms of trade will move in favor of the United States.
B) The United States will experience an increase in the volume of imports.
C) International speculators will buy U.S. dollars and sell other currencies.
D) U.S. exports will become cheaper relative to other nations' products.

Question

Quizplus · Accepted Answer

A depreciation of the U.S. dollar means that it is worth less in comparison to other currencies. This makes U.S. exports cheaper relative to other nations' products, which makes them more competitive and attractive in international markets. It also means that imports become more expensive, so the volume of imports would likely decrease rather than increase (eliminating option B). The terms of trade refer to the ratio of export prices to import prices, and a depreciation of the U.S. dollar does not necessarily mean that the terms of trade will move in favor of the United States (eliminating option A). While international speculators might engage in currency trading in response to a currency depreciation, it is not a necessary consequence (eliminating option C).

Other Things Being Equal, Which of the Following Is a Necessary