Currency Appreciation Lowers Import Prices

Steps:

• Current account surplus indicates exports exceed imports, creating excess demand for the domestic currency.
• In a floating exchange rate system, this demand causes the domestic currency to appreciate.
• Appreciation makes foreign goods cheaper in domestic currency terms.
• Thus, import prices in the domestic market decrease.

Why C is correct:

• Currency appreciation reduces the domestic price of imports, as defined by the exchange rate's impact on import valuation (P_domestic = P_foreign × exchange rate).

Why the others are wrong:

• A: Exports likely increase initially due to the surplus, not decrease.
• B: Employment may rise from export-led growth, not fall.
• D: The currency value appreciates (increases), not decreases.

Final answer: C