Answered: What effect does a high exchange rate…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 3CQ

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What effect does a high exchange rate have on imports, exports, and that country's production?

Expert Solution

Step 1

The rate that measures the value of a nation’s currency in terms of another nation’s currency is known as the exchange rate. It depicts the total units of foreign currency that can be bought with a single unit of domestic currency.

Step 2

When the exchange rate rises, the value of domestic currency in relation to foreign currency increases. This is known as appreciation of currency.

Step 3

A higher exchange rate makes goods produced in the domestic country expensive. Thus, the demand of domestic goods falls, leading to fall in exports as well.

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