The devaluation of a currency results in a(n):
A) initial increase in trade balance, but an eventual decline in the trade balance.
B) permanent decline in the trade balance.
C) permanent increase in the trade balance.
D) initial decrease in trade balance, but an eventual increase in the trade balance.

Question

Quizplus · Accepted Answer

When a currency is devalued, its exports become cheaper while its imports become more expensive, which should lead to an increase in exports and a decrease in imports, resulting in an initial decrease in the trade balance. However, over time, the increased competitiveness of exports should lead to an increase in demand for the devalued currency, causing it to appreciate and eventually leading to an increase in the trade balance. Therefore, while there may be an initial decrease, there should be an eventual increase in the trade balance.

The Devaluation of a Currency Results in A(n)