Currency depreciation improves trade balance

Steps:

• The exchange rate falls from 1.64 to 1.25 $ per £, indicating pound depreciation.
• Depreciation makes UK exports cheaper for foreigners, boosting export volume.
• It makes imports more expensive for UK consumers, reducing import volume.
• Net effect: exports rise relative to imports, narrowing the current account deficit.

Why B is correct:

• Current account deficit measures excess imports over exports; depreciation reduces this gap via higher exports and lower imports, per the balance of payments definition.

Why the others are wrong:

• A: Depreciation raises import costs, increasing cost-push inflation from higher input prices.
• C: Higher import prices reduce quantity demanded, decreasing imports.
• D: Trade deficit (exports minus imports) shrinks with more exports and fewer imports.

Final answer: B