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Basic Question 10 of 15
Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic ______
B. output falls to a lower level.
C. spending is cut, thus freeing resources to produce exports.
A. income rises, thus stimulating consumption.
B. output falls to a lower level.
C. spending is cut, thus freeing resources to produce exports.
User Contributed Comments 1
| User | Comment |
|---|---|
| niuer | In this case the income cannot be increased as it's already at full employment, so the expenditure has to be cut for the absorption effect to take place. |
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Learning Outcome Statements
describe exchange rate regimes and explain the effects of exchange rates on countries' international trade and capital flows
CFA® 2024 Level I Curriculum, Volume 1, Module 7.