CFA Level I · CFA Level I Exam · International Trade
Large, sustained capital inflows into an emerging market country are most likely to cause its currency to:
Sustained capital inflows most likely cause the currency to appreciate and the current account deficit to widen. Foreign investors buy domestic currency to invest, lifting its value, which makes exports less competitive and imports cheaper, so the trade and current account balance deteriorates.
- Adepreciate and its exports to become more competitive
- Bappreciate and its current account deficit to widenCorrect
- Cremain stable because flows offset trade
Explanation
Capital inflows raise demand for the domestic currency, causing appreciation. A stronger currency makes exports costlier and imports cheaper, which tends to widen the current account deficit. Depreciation would follow outflows, not inflows.
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