An economy operating with a floating exchange rate and high capital mobility is experiencing a persistent current account deficit. If the central bank implements a monetary contraction by significantly raising the benchmark interest rate, which of the following is the most likely initial impact on the country's balance of payments?
A depreciation of the currency, leading to an improvement in the current account balance and a reduction in the financial account surplus.
An appreciation of the currency, leading to an increase in the financial account surplus but a worsening of the current account deficit.
An improvement in the current account balance due to cheaper raw material imports, balanced by a net deficit on the financial account.
A widening of both the current account deficit and the financial account surplus due to domestic capital flight.
310 exam-style questions on AQA A Level Economics 2.6 The international economy (A-level only), covering 2.6.1 Globalisation, 2.6.2 Trade, 2.6.3 The balance of payments, 2.6.4 Exchange rate systems, and 2.6.5 Economic growth and development. Each one has a worked solution and a mark scheme showing where the marks go.