If the Australian dollar depreciates, what is the typical effect on net exports and the current account, assuming other factors constant?

• A. Exports cheaper and imports more expensive; exports rise, imports fall; current account improves.
• B. Exports more expensive and imports cheaper; current account worsens.
• C. A weaker AUD makes exports cheaper and imports more expensive, supporting higher exports and lower imports, improving the current account.
• D. Depreciation has no effect on the current account; it only affects exchange rates.

Answer: (C)

When the Australian dollar depreciates, it becomes cheaper for foreign buyers to purchase Australian goods and services, while Australian residents face higher prices for imported goods. This tends to boost demand for Australian exports and reduce demand for imports. With higher exports and lower imports, net exports rise, which improves the current account in the short run, assuming other factors stay the same. This is why a weaker AUD is typically associated with higher exports, lower imports, and an improved current account.