A depreciation of the Australian dollar typically has what effect on the current account?

• A. A depreciation worsens the current account by increasing import costs.
• B. The current account balance is unaffected by exchange rate changes.
• C. A depreciation has no impact on trade volumes.
• D. A depreciation of the AUD makes exports cheaper and imports more expensive, improving the current account.

Answer: (D)

When the Australian dollar depreciates, it changes the relative prices of traded goods. A weaker AUD makes Australian exports cheaper for foreign buyers and makes imports more expensive for Australians. This tends to boost export volumes while reducing import volumes, improving the net exports component of the current account. Over time this pushes the current account toward a better position, though price and demand adjustments can take time (short-run effects may vary). So the depreciation tends to improve the current account by increasing exports and decreasing imports.