Which of the following is a consequence of a trade deficit? (2019)

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Question: Which of the following is a consequence of a trade deficit? (2019)

Options:

Correct Answer: Depreciation of the national currency

Exam Year: 2019

Solution:

A trade deficit can lead to the depreciation of the national currency as more currency is sold to purchase foreign goods.

Which of the following is a consequence of a trade deficit? (2019)

Which of the following is a consequence of a trade deficit? (2019)

Step 1: Understand what a trade deficit is. A trade deficit occurs when a country imports more goods and services than it exports.
Step 2: Recognize that to buy foreign goods, a country needs to exchange its own currency for foreign currency.
Step 3: Realize that when a country buys a lot of foreign goods, it sells its own currency to get foreign currency.
Step 4: Understand that selling more of your currency can decrease its value, which is called depreciation.
Step 5: Conclude that a trade deficit can lead to the depreciation of the national currency because more of it is being sold to buy foreign goods.

No concepts available.