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

Question

Quizplus · Accepted Answer

A country's undervalued currency would make its exports relatively cheaper and its imports more expensive, increasing demand for its exports but reducing demand for imports. This would lead to a surplus in the current account but a deficit in the capital account as foreign investors seek to take advantage of the undervaluation by buying up assets in the country.

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