If a country with high unemployment, a balance of payments deficit, and fixed exchange rates decides to abandon it fixed exchange rate and allow its exchange rate to float, which among the following will be a probable effect?
A)Its currency will depreciate, increasing international competitiveness and leading to higher aggregate demand and an improvement in the current account.
B)Its currency will appreciate, increasing international competitiveness and leading to higher aggregate demand and an improvement in the current account.
C)Its currency will depreciate, decreasing international competitiveness and leading to lower aggregate demand and an improvement in the current account.
D)Its currency will appreciate, decreasing international competitiveness and leading to lower aggregate demand and a worsening of the current account.

Question

Quizplus · Accepted Answer

By allowing its exchange rate to float, the country's currency will likely depreciate. This depreciation will increase the international competitiveness of the country's goods and services, leading to higher aggregate demand and an improvement in the current account. This is because foreign buyers will be able to purchase more of the country's goods and services for the same amount of their own currency, making them more enticing. A weaker currency also makes domestic goods cheaper for domestic consumers, leading to increased domestic demand for those goods, which also raises aggregate demand.

If a Country with High Unemployment, a Balance of Payments