Question

The country of Ninook is adversely affected by trade deficits and so the government wants to move to a floating exchange rate system. The government believes that moving to a floating rate would help adjust trade imbalances. However, a political group in Ninook is opposing this. As critics of floating exchange rates, they claim that trade deficits are determined by the
Multiple Choice



A. external value of the currency of a country.


B. balance between savings and investment in a country.


C. mechanism of competitive currency devaluation.


D. valuations made by International Monetary Fund and the World Bank.


E. exchange rates of other currencies.

Answer 1

Answer:

B. balance between savings and investment in a country.

Explanation:

Critics of floating exchange rate system claim that a trade deficit (where imports exceed exports) is determined by the savings-investment balance. By the identity

S - I = X - M,

If Saving > Investment, there is a trade surplus.

If Saving < Investment, there is a trade deficit.