If an economy initially maintains both internal and external equilibrium, what effect will a decrease in aggregate demand have on the current account?

Multiple choice question for Macroeconomic Issues and Analysis. Select an option, then review the explanation below.

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It will lead to a current account deficitIt will result in a current account surplusIt will cause a currency revaluationIt will trigger a currency devaluationNo significant change in the current account

Explanation

When aggregate demand falls from a balanced state, imports typically decline more than exports, improving the trade balance and causing the current account to move into surplus.

Practice related questions from the same subject.

1.Which of the following is NOT considered an advantage of the single market?
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3.In a country with a floating exchange rate system, what is the likely effect on its currency if its inflation rate exceeds that of its trading partners?
4.In a floating exchange rate system, how do expectations of rising interest rates typically affect the currency's exchange rate?
5.How does a fixed exchange rate combined with full capital mobility affect the effectiveness of monetary policy?

If an economy initially maintains both internal and external equilibrium, what effect will a decrease in aggregate demand have on the current account?

Explanation

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