Currency depreciation impacts on macro aims

Steps:

• Overvalued fixed exchange rate causes persistent trade deficits by making exports expensive and imports cheap.
• Switching to floating rate allows currency to depreciate, correcting the overvaluation toward market equilibrium.
• Depreciation boosts net exports, increasing aggregate demand and supporting growth and employment.
• However, higher import prices from depreciation raise overall price levels, hindering low inflation.

Why A is correct:

• Depreciation increases cost of imported goods, directly causing imported inflation per the exchange rate pass-through effect.

Why the others are wrong:

• B: Export-led demand expansion lowers unemployment via multiplier effects on output.
• C: Net exports improve, reducing balance of payments deficit as per the elasticities approach.
• D: Higher aggregate demand from exports sustains economic growth without overheating.

Final answer: A