Question

If the home currency begins to depreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same). Question 4 options: all of the above are equally possible have no impact on reduce increase

Answer 1

Answer:

Home currency depreciation would increase current account balance.

Explanation:

Home Currency Depreciation means fall in value of home currency in terms of foreign currency.

Current Account is BOP component account, recording financial transactions (goods & services trade, unilateral transfers) of economy with the rest world.

It means home currency,  its products (exports) are cheaper for foreigners. And foreign currency, their products (imports) are expensive for us. So, Exports will rise & Imports will fall. This will lead to - foreign exchange inflow (credit) from exports,  exceeding foreign exchange outflow (debit) from imports. Hence, it will improve (increase) current account balance.