If there is a balance of payments deficit then in a floating exchange rate system ?
Correct answer: A. The external value of the currency would tend to fall
- A. The external value of the currency would tend to fall
- B. The external value of the currency would tend to rise
- C. The injections from trade are greater then the withdrawals
- D. Aggregate demand is increasing
Explanation
In a floating exchange-rate system, a balance-of-payments deficit creates excess supply of the domestic currency in the foreign-exchange market. Its external value therefore tends to depreciate.
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