Natural Resource Discovery Boosts Trade Balance and Currency Value

Steps:

• Recall that exchange rate appreciation occurs when demand for the domestic currency rises relative to supply.
• Evaluate each option's impact on currency demand via trade, inflation, or monetary factors.
• Identify options that worsen trade deficits or increase money supply as depreciating forces.
• Select the option improving current account through import substitution.

Why D is correct:

• Discovering a natural resource replacing imports improves the current account balance (exports rise or imports fall), increasing foreign demand for the domestic currency per the balance of payments approach.

Why the others are wrong:

• A: Demand-pull inflation raises domestic prices, making exports less competitive and depreciating the currency.
• B: Higher national income boosts imports, worsening the trade balance and reducing currency demand.
• C: Raising money supply lowers interest rates, prompting capital outflows and currency depreciation.

Final answer: D