Under a pegged exchange rate system which does not explain why a country would have a balance of payments deficit ?
Correct answer: D. the domestic currency is undervalued relative to other currencies
- A. very high rates of inflation occur domestically
- B. foreigners discriminate against domestic products
- C. technological advance is superior abroad
- D. the domestic currency is undervalued relative to other currencies
Explanation
An undervalued domestic currency makes exports cheaper and imports more expensive, which tends to produce a balance-of-payments surplus rather than a deficit. High domestic inflation, foreign discrimination, or superior foreign technology can each worsen the deficit.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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