In a Stable Foreign Exchange Market,a Nation Can Correct a Deficit

question 26

Multiple Choice

In a stable foreign exchange market,a nation can correct a deficit in its balance of payments by allowing its currency to __________.

• A)appreciate
• B)depreciate
• C)remain constant
• D)none of the above

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Definitions:

Trade Deficit

The amount by which a nation’s imports of goods (or goods and services) exceed its exports of goods (or goods and services).

Purchasing-Power-Parity Theory

The idea that if countries have flexible exchange rates (rather than fixed exchange rates), the exchange rates between national currencies will adjust to equate the purchasing power of various currencies. In particular, the exchange rate between any two national currencies will adjust to reflect the price-level differences between the two countries.

Inflation Rates

The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Current Account Deficit

A situation where a country's total imports of goods, services, and transfers exceed its total exports, indicating it is spending more abroad than it is earning.