If a country's freely floating currency is undervalued in terms of purchasing power parity,its capital account is likely to be

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If a country's currency is undervalued in terms of purchasing power parity, its exports become cheaper and attractive to foreigners, leading to an increase in demand for its goods and services. This leads to an increase in the country's exports and a decrease in its imports. As a result, the country faces a surplus on its current account. However, since its currency is undervalued, the inflow of foreign investment decreases, leading to a deficit or tending towards a deficit on its capital account.

If a Country's Freely Floating Currency Is Undervalued in Terms