Question

In a floating exchange rate system, a current account deficit is likely to be corrected by :

a. a depreciation of the home currency

b. an appreciation of the home currency

c. a prolonged period of hyperinflation

d. an expansion of domestic money supply

e. a decrease in domestic tax rates

Answer 1

a. a depreciation of the home currency

Step-by-step explanation:

Floating exchange rate system is a system in which the exchange rates of any currency depends upon the forex market, basically the supply and demand force of the country in international trade.

Depreciation in home currency will make it cheaper for the country top export, as less payment need to be made for same goods by other country if the home country exports.

Imports will turn expensive, which shall decline imports.

Accordingly receipts will increase and payments will decrease, which shall result in re framing current account and the deficit shall be decreased and might be reversed into surplus.