A country running a current account deficit over a long time is likely to see its exchange rate:
A) hold steady.
B) appreciate.
C) depreciate.
D) the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked.

Question

Quizplus · Accepted Answer

A current account deficit means that the country is spending more on imports than it is earning through exports. This leads to a higher demand for foreign currencies, which in turn causes the exchange rate of the country's currency to depreciate. This depreciation makes the country's exports cheaper and imports more expensive, which over time can reduce the current account deficit. Therefore, a long-term current account deficit is likely to lead to a depreciating exchange rate.

A Country Running a Current Account Deficit Over a Long