Question #20
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 8
Status: Unattempted
Correct Answer: A
Question
The following information is gathered for three countries: Country Comment A Current account deficit is very large relative to GDP B Imports highly price-elastic goods C Exports global commodities Which country will most likely see its current account deficit restored to sustainable level more rapidly under the flows mechanism of balance of payments?
Answer Choices:
A. B) Country
B. C) Country
C. Country C
Explanation
Countries with lower initial current account deficits, with import and export prices
sensitive to exchange rate movements and with imports and exports with high price
elasticity of demand would see their current account deficits quickly restored to
sustainable level due to depreciation of their currency. Country B imports goods that have
high price elasticity. Country A has large current account deficit and hence will take time to
adjust to sustainable level. Country C exports commodities whose global prices are not
sensitive to their own currency's values.