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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