A rise in the exchange rate (S) leads to:
A) an increase in the current account
B) a decrease in the current account
C) no change in the current account
D) an indeterminate effect on the current account, which will ultimately depend on the relative . elasticities of demand for imports and exports

Question

Quizplus · Accepted Answer

A rise in the exchange rate can have different effects on the current account depending on the price elasticity of demand for imports and exports. If the demand for a country's exports is elastic, a rise in the exchange rate could lead to a significant decrease in the quantity of exports demanded, potentially worsening the current account. Conversely, if the demand for imports is elastic, the higher exchange rate could reduce the quantity of imports, potentially improving the current account. The overall effect is thus indeterminate without knowing the relative elasticities.

A Rise in the Exchange Rate (S) Leads To