For this question, assume that all price levels are fixed. Now suppose that there is a real exchange rate depreciation. This real depreciation will cause which of the following to occur?
A) A decrease in net exports.
B) A decrease in exports.
C) An increase in net exports.
D) An increase in imports.
E) A decrease in demand for domestic output.

Question

Quizplus · Accepted Answer

A real exchange rate depreciation means that the domestic currency has weakened relative to other currencies, making exports relatively cheaper for foreign buyers and imports relatively more expensive for domestic buyers. As a result, exports are likely to increase, which would lead to an increase in net exports (exports minus imports).

For This Question, Assume That All Price Levels Are Fixed