CFA Practice Question

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CFA Practice Question

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 ______

A. income rises, thus stimulating consumption.
B. output falls to a lower level.
C. spending is cut, thus freeing resources to produce exports.
Correct Answer: C

Income must increase relative to expenditure.

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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