If a country's freely floating currency is undervalued in terms of purchasing power parity,its capital account is likely to be
A)in deficit or tending toward a deficit
B)in surplus or tending toward a surplus
C)Subsidized by the International Monetary Fund
D)a candidate for loans from the World Bank

Question

Quizplus · Accepted Answer

If the currency is undervalued, then imports become more expensive for the country's residents while its exports become cheaper for foreign consumers. This leads to a higher demand for imports and lower demand for exports, resulting in a trade deficit. To finance this deficit, the country will need to borrow from foreign sources, which increases the capital account deficit or tendency toward a deficit.

If a Country's Freely Floating Currency Is Undervalued in Terms