Assertion (A): Under a flexible exchange rate, a BoP deficit tends to correct itself.
Reason (R): Excess demand for foreign currency makes the home currency depreciate, which raises exports and cuts imports.

Both A and R are true, and R is the correct explanation of A.Correct answerYour answerBoth A and R are true, but R is not the correct explanation of A.Correct answerYour answerA is true, but R is false.Correct answerYour answerA is false, but R is true.Correct answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer A

Correct answer: A

Depreciation makes exports cheaper abroad and imports dearer at home, closing the gap. R explains A.

Concept: Self-correction under floating rates
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsThe flexible rate: depreciation and appreciation

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Ten questions from Foreign Exchange Rate, at your own pace.

Assertion (A): Under a flexible exchange rate, a BoP deficit tends to correct itself.Reason (R): Excess demand for foreign currency makes the home currency depreciate, which raises exports and cuts imports.

Explanation

Assertion (A): Under a flexible exchange rate, a BoP deficit tends to correct itself.
Reason (R): Excess demand for foreign currency makes the home currency depreciate, which raises exports and cuts imports.