Question 49
Balance of Payments and Exchange RatesIf a country operates a freely floating exchange rate system, and suffers a balance of payments deficit, the deficit can be eliminated through
- A.a rise in the external value of its currency
- B.a fall in the external value of its currency
- C.an increase in the volume of imports
- D.the consumption of more foreign goods.
Show the answer and explanation
Answer: B (a fall in the external value of its currency)
Explanation
A fall in the currency's value makes exports cheaper abroad and imports dearer at home, so exports rise, imports fall and the deficit closes.