Question

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

Answer 1

Answer:

Upward pressure

Explanation:

A country's current account represents its balance of payments in international transactions. The main components of the account include goods and services,  net international transfers, and investments. A deficit in the current account implies that a country's imports exceed exports; in other words, the country is a net importer.

A trade deficit implies that local business and citizens are using the local currency to make payments for foreign goods, services, and investments. The local currency has to be converted to the exporting country's currency to facilitate the transaction. The more a country imports, the more it supplies its currency to the currency exchange market.

A decrease in trade deficit means the country has decreased its imports. The supply of its currency in the currency has been reduced, which leads to the currency appreciating in value.