Under a system of flexible exchange rates,the currency of a country experiencing a balance of payments deficit would (relative to other currencies)
A) appreciate, causing an increase in net exports.
B) appreciate, causing a decrease in net exports.
C) depreciate, causing a decrease in net exports.
D) depreciate, causing an increase in net exports.
E) depreciate or appreciate, depending on supply and demand.

Question

Quizplus · Accepted Answer

When a country experiences a balance of payments deficit, it means that its imports exceed its exports. This leads to an excess supply of the country's currency in the foreign exchange market, which puts downward pressure on the currency's exchange rate. As a result, the currency depreciates relative to other currencies, making imports more expensive and exports cheaper. This depreciation can lead to an increase in net exports, which helps to reduce the balance of payments deficit. Therefore, under a system of flexible exchange rates, the currency of a country experiencing a balance of payments deficit would depreciate, causing an increase in net exports.

Under a System of Flexible Exchange Rates,the Currency of a Country