Which one of the following correctly describes how market forces under a floating exchange rate system act to correct a balance of trade imbalance?
A trade deficit causes an excess demand for the currency, leading to an appreciation that increases the competitiveness of exports.
A trade deficit causes an excess supply of the currency, leading to a depreciation that improves the competitiveness of exports.
A trade surplus causes an excess supply of the currency, leading to a depreciation that makes imports relatively cheaper.
A trade surplus causes an excess demand for the currency, leading to an appreciation that improves the competitiveness of exports.
