Question

A large reduction in the current account deficit will place ____ pressure on the home currency value, other things being equal. a. upward b. downward c. no d. upward or downward (depending on the size of the deficit)

Answer 1

Answer:

Upward.

Explanation:

A large reduction in the current account deficit will place Upward pressure on the home currency value, other things being equal.

When their currency's value decreases, this means the valuation of foreign assets are rising. This further decreases the deficit in the current account. Additionally, a reduced currency value tends to increase export markets when prices become more cutthroat. Export demand falls as prices rise with inflation setting in.