Question

If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same).

Answer 1

Answer:Option C

Explanation:

this should reduce the current account balance. Because the increase would cause expenses to reduce since the value of the currency is higher.

Answer 2

Answer:

The correct answer is letter "A": reduce.

Explanation:

The foreign currency exchange rate is a factor of risk for companies because of its fluctuations. In general, firms prefer to invest in countries with economic and politic stability because they tend to have stable currencies. In such a way, companies prefer to make their transactions in the domestic currency to avoid de devaluation of foreign currency.

Therefore, if a company handles operations in a foreign currency but the domestic currency begins to appreciate, the amount of money in the account balances will reduce. If the domestic currency devaluates, the firm would have more money in its account as a result of currency translation.