Explain how does an increase in the real exchange rate affect exports and imports?
What will be an ideal response?
When the real exchange rate increases, domestic products are cheaper relative to foreign products. Due to this, exports increase as foreigners demand more of our exports. The change in imports is ambiguous because fewer units of imports are purchased (the volume effect), but each foreign unit is now more expensive (the value effect). Remember: exports and imports are measured in terms of domestic output, i.e. dollar value, not volume of units. However, we often assume that the volume effect outweighs the value effect, so that imports decrease when the real exchange rate rises.
You might also like to view...
What is a necessary condition for sustainable economic growth?
A) Low cost systems of transportation and communication B) Careful economic planning C) Very high interest rates that encourage household saving D) Government monitoring and manipulation of aggregate investment E) All of the above.
If buyers were required to pay the federal excise tax on gasoline directly to the government, the demand curve for gasoline would shift up
Indicate whether the statement is true or false
A long line at the campus bookstore at the beginning of the term is an example of
A) price rationing. B) an ineffective price ceiling. C) a non-price rationing device. D) an ineffective price floor.
Would a new growth theorist expect economic growth to be very rapid in one of the Communist nations before the fall of Communism? Why or why not?
What will be an ideal response?