Question

c) How exchange rates may correct a balance of trade deficit?

Answer 1

Exchanges rates play a very vital roles in the trade between the countries as appreciation of the value of a country's currency makes its exports costlier resulting in lower demand for the company's exports and vice versa, In the same way, depreciation of the value of a country's currency makes its imports costlier resulting in decline in imports by the country and vice versa.

So when there is trade deficit, this means exports are lesser than the imports, so to increase the exports the country might depreciate the value of its currency through various monetary policy and other efforts leading to making exports cheaper in the international market which would result in higher exports and balance the trade.

the above is answer..