I guess it depends on how you interpret the question. I wouldn't have chosen D because if a country fixes its exchange rate below the equilibrium rate, then it will lead to a decrease in the purchasing power of that country's currency. This is adverse during a boom as there is often high levels of inflation due to demand pull factors; if the currency depreciates during this time, this would a) increase the country's international competitiveness and hence increase the volume of exports and b) make it less attractive for domestic consumers to seek alternatives from oversea markets, thus contributing to inflation again. Both of these outcomes is unfavourable, leading to excessive inflation which is unsustainable. However, there is also your argument (regarding the CAD), which is valid as well.
I think A would be more appropriate as during a recession a country would benefit from having a lower exchange rate. This would increase the country's international competitiveness, stimulating aggregate demand (X) and economic growth through exports. With option A, there isn't the problem of a CAD because exports will (only) increase while imports will decrease and, since Australia's service obligations are denominated in AUD, the valuation effect will not affect the primary incomes account.
Right, I checked to see which was right and both A and D would have been right for that particular case, which I think is odd. It's a bad question and both have valid arguments, but I'm still hesitant to go with A only because of the wording of the question. Here's why
The reason I did not choose A (B,C were obviously eliminated) is because during a recession aggregate demand
would have be low and by extension, inflationary pressures as well --> this would increase international competitiveness through more exports etc. If a country used this as an argument for fixing its exchange rate, I argue that it's not necessary because during a recession inflationary pressures are already low and exports will begin rising by the cyclical nature of the business cycle, this to me is a given and you don't need a fixed exchange rate to overcome this.
In D, during a boom aggregate demand would be high as well as inflation. Increasing inflation erodes your international competitiveness, and by fixing your exchange rate to a lower value you'll obviously be able to maintain or increase current export volumes. You cannot increase volumes of exports during high inflationary pressures.
The key difference is that during a boom where inflationary pressures are high, a country
cannot experience an increase in export volumes - as is in D. However, during a recession, a country
can experience an increase in international competitiveness because a decrease in aggregate demand, by extension, will reduce inflationary pressures and thus increase exports.
Think of it this way,
a country doesn't need a fixed exchange rate to experience an increase in export volumes during a recession. Conversely,
a country does need a fixed exchange rate to experience an increase in export volumes during a boom.
Then because of the above, I would definitely pick D over A. I could see the argument made for A if extra additional information was provided by the question, but unless I'm misunderstanding something I don't think it is the best for the above reasons and I'm happy to be corrected otherwise.
