Question

Rindistan currently runs a current account deficit with Ackland. to make up the difference, Rindistan prints...

Rindistan currently runs a current account deficit with Ackland. to make up the difference, Rindistan prints up more of its curreny, the Rael. Both countries have flexible exchange rates. The increased supply of Raels will cause
Multiple Choice
*The Rael to appreciate relative to Ackland's currency
*The Rael to depreciate relative to Ackland's currency
*Neither an appreciation nor a depreciation of the Rael
*Unable to determine

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Homework Answers

Answer #1

Option B is correct!!.

As we know that Rindistan is running current account deficit, this means it has imported more than what it has exported. Therefore in order to pay higher import bills, printing of its currency will increase supply of Raels in the foreign exchange market. Holding other things constant, increase supply of Raels will lead its value to depreciate relative to Ackland's currency.

Hence Option B is correct!!.

Other options are wrong because we can determine what will happen to the value of Raels.

Please Upvote and Support!!

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