If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same).

Question

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When the home currency appreciates, it becomes relatively more expensive to purchase goods and services from the home country. This reduces the demand for home country exports, which in turn reduces the current account balance. Therefore, an appreciation in the home currency typically reduces the current account balance.

If the Home Currency Begins to Appreciate Against Other Currencies