Undervalued Currency Boosts Exports

Steps:

• Recall current account surplus occurs when exports exceed imports plus net transfers and income.
• Identify factors affecting trade balance: exchange rates influence competitiveness of goods.
• Analyze undervaluation: it lowers export prices abroad and raises import prices domestically.
• Conclude the net effect favors surplus through higher exports and lower imports.

Why B is correct:

• An undervalued exchange rate makes domestic goods cheaper for foreigners (boosting exports) and foreign goods costlier (curbing imports), per the elasticities approach in international trade theory.

Why the others are wrong:

• A: Low domestic savings increases reliance on foreign capital, leading to current account deficits via higher imports.
• C: High protectionism by other countries restricts access to foreign markets, reducing exports and causing deficits.
• D: Low investment income from abroad directly subtracts from the current account, worsening the balance.

Final answer: B