A country with budget deficit which is also at full employment can improve its deficit situation by allowing its currency to depreciate,only if,
A)the real domestic absorption is reduced
B)the real domestic absorption is increased
C)level of imports can be increased
D)income can be increased

Question

Quizplus · Accepted Answer

Allowing the currency to depreciate would make imports more expensive, which should reduce the level of imports and increase the level of exports. This should lead to a reduction in the real domestic absorption, as the economy shifts toward producing more goods for export and fewer for domestic consumption. This in turn should improve the budget deficit situation. If the real domestic absorption were to increase instead, the budget deficit situation would worsen. Increasing income alone would not be sufficient to improve the deficit situation.

A Country with Budget Deficit Which Is Also at Full