Which one of the following statements is the MOST accurate?
A)An increase in the real exchange rate and an increase in disposable income improve the current account.
B)A decrease in the real exchange rate and a decrease in disposable income improve the current account.
C)A decrease in the real exchange rate and a increase in disposable income improve the current account.
D)An increase in the real exchange rate and a decrease in disposable income improve the current account.
E)An increase in the real exchange rate and a decrease in disposable income lowers the current account.

Question

Quizplus · Accepted Answer

An increase in the real exchange rate means that the country's currency appreciates relative to other currencies, making exports more expensive for foreigners and imports cheaper for domestic consumers. This leads to a decrease in exports and an increase in imports, which leads to a deterioration in the current account balance. However, a decrease in disposable income would decrease imports, which would improve the current account balance. Therefore, an increase in the real exchange rate and a decrease in disposable income would improve the current account balance.

Which One of the Following Statements Is the MOST Accurate