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

Question

Quizplus · Accepted Answer

If the home currency appreciates, its goods and services become more expensive for foreign buyers and exports will decrease, leading to a decrease in the current account balance. Additionally, imports become cheaper for domestic consumers, increasing the demand for imports and further decreasing the current account balance. Thus, the appreciation of the home currency will reduce the current account balance.

If the Home Currency Begins to Appreciate Against Other Currencies