Country Z exports $5 million of goods and services and imports $5 million of goods and services. It also has $10 million of foreign currency denominated foreign assets and $5 million of local currency denominated foreign liabilities both of which earn a fixed 5% return in their respective currencies. If the price elasticity of exports is 0.5 and the elasticity of imports is (-)0.4 what will happen to the current account if the exchange rate depreciates by 1%?

Select one:

a.

worsens by $0.005 million

b.

improves by $0.055 million

c.

improves by $0.005 million

d.

improves by $0.045 million

e.

it is unchanged