Question

A. In the short-term a currency depreciation will worsen the trade balance if    no domestic...

A. In the short-term a currency depreciation will worsen the trade balance if

  

no domestic producer of an import.

   

no domestic buyer for an import.

   

no export market for a country's output.

   

none of the options

B.

Latervia is a very small country that has exports of $100,000, imports of $20,000, unilateral transfer $-150,000. What is Latervia's balance on current account?

  

-$70,000

   

$230,000

   

-$30,000

   

$270,000

Homework Answers

Answer #1

Answer 1

OPTION C: no export market for a country's output

Reason:

When currency depreciates, goods of home country (domestic goods) become cheaper and more attractive for outside markets as they can buy more with less amount. This is because the currency of domestic country has become weak in comparison to foreign currency. But if the domestic country does not have an export market, it will lead to no exports, imports become constant/increasing. This will further worsen the trade balance.

Note: When exports < imports, trade balance shows deficit.

Answer 2

OPTION A: $ -70,000

Reason:

Balance on Current Account = (Exports - Imports) + Net Income + Net Transfer

= $ 100,000 - $ 20,000 + (-$150,000)

= $ 80,000 - $ 150,000

= $ -70,000

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