Question

An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.

Answer 1

When there is an increase in the deficit of the current account, the pressure on the home currency value all things equal would be a downward pressure.

What happens when there is a current account deficit?

A current account deficit means that the country is earning less from exporting goods to other countries than it is losing from importing from other nations.

What this means is that more money is flowing out of the country than the money that is coming in. What this leads to a loss in currency value because it points to less demand for the home currency.

This is because the deficit would place a downward pressure on the local currency. On the upside, this decrease in currency value might spur exports which would lead to a better current account balance.

In conclusion, there will be downward pressure.

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