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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Holding other things constant, an appreciation of a nation’s currency causes

a. exports to rise and imports to fall.

b. exports to fall and imports to rise.

c. both exports and imports to rise.

d. both exports and imports to fall.

To determine

The impact of appreciation of domestic currency on imports and exports.

Explanation

The appreciation of domestic currency is the procedure in which the domestic currency becomes stronger with regard to the foreign currency. The domestic currency will get more foreign currency in exchange in such situations. This happens when the demand for the domestic currency increases in the exchange market or the supply of the domestic currency decreases in the exchange market.

Option (b):

When all other factors are constant and the domestic currency appreciates, it will make the domestic currency stronger than the foreign currencies. As a result, the domestic goods and services will become costly due to the higher exchange rate in the economy. When the domestic goods become costly compared to the foreign goods, the foreigners will reduce the demand for the domestic goods of the appreciating country and so, it will reduce the exports of the economy. Similarly, the domestic consumers will demand cheaper foreign goods that increase the imports of the economy. So, option 'b' is correct.

Option (a):

When the domestic currency appreciates, it increases the amount of foreign currency required to purchase the domestic currency. As a result, the domestic goods and services will become costly in the international market...

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