Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

Question

​Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

Quizplus · Accepted Answer

When Country A's currency depreciates against Country B's currency, Country A's goods become cheaper for both B and C (since C's currency is pegged to B's). This makes A's exports to C more competitive, likely increasing them. Conversely, C's goods become relatively more expensive for A, likely decreasing A's imports from C.

​Assume Countries A, B, and C Produce Goods That Are

Assume Countries A, B, and C Produce Goods That Are