How does a change in a country's real exchange rate affect its net exports?

(A) When a country's real exchange rate appreciates , it imports less and exports more , causing its net exports to fall.

(B) When a country's real exchange rate appreciates , it imports more and exports less , causing its net exports to rise.

(C) When a country's real exchange rate appreciates , it imports more and exports less , causing its net exports to fall.

(D) The real exchange rate does not impact a country's net exports.

Question

Kieran Larson

Business

13 March, 12:29

How does a change in a country's real exchange rate affect its net exports?

(A) When a country's real exchange rate appreciates , it imports less and exports more , causing its net exports to fall.

(B) When a country's real exchange rate appreciates , it imports more and exports less , causing its net exports to rise.

(C) When a country's real exchange rate appreciates , it imports more and exports less , causing its net exports to fall.

(D) The real exchange rate does not impact a country's net exports.

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Answers (1)

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Lara · Answer 1

Answer: (C) When a country's real exchange rate appreciates , it imports more and exports less , causing its net exports to fall.

Explanation:

When a country's real exchange rate appreciates i. e the value of its currency increases, it imports more because more products could be bought with the same amount of the currency as a result of its increased value, and it export less because their goods would become more expensive for other countries resulting in reduced demand. Therefore, resulting in the fall of its net export. This is a form of trade balance.