A floating exchange rate could correct any international trade imbalances as a deficit in a country's balance of trade suggests that the country is spending more funds on foreign products than it is receiving from exports to foreign countries. Because it is selling its currency (to buy foreign goods) in greater volume than the foreign demand for its currency, the value of its currency should decrease. This decrease in value should encourage more foreign demand for its goods in the future. However, even if a country's home currency weakens, its balance-of-trade deficit may not necessarily be corrected. Discuss the reasons why.

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While a floating exchange rate can theoretically help correct international trade imbalances by adjusting the value of a countrys currency there are s... View the full answer