Current account deficit reduces aggregate demand, raising unemployment

Steps:

• Current account shifts from surplus to deficit, signaling lower net exports.
• Lower net exports decrease aggregate demand in the economy.
• In the short run, reduced aggregate demand slows output and hiring.
• This leads to higher cyclical unemployment under floating exchange rates.

Why D is correct:

• Per Okun's law, a GDP slowdown from falling net exports increases unemployment by 1% for every 2% GDP drop.

Why the others are wrong:

• A: Economic growth rate falls due to lower aggregate demand from the deficit.
• B: Exchange rate depreciates (domestic currency weakens), so its value decreases.
• C: Interest rates likely fall as central bank responds to weaker growth.

Final answer: D