If two countries, A and B, have separate currencies and there is a shift in consumer preferences away from the goods of country A and towards those of country B, then
A) there will be an increase in inflation in country A.
B) the foreign exchange value of country A's currency is likely to rise, thus making country A's goods relatively more expensive and worsening the reduction in aggregate demand in country A.
C) the foreign exchange value of country A's currency is likely to fall, thus making country A's goods relatively cheaper and offsetting the reduction in aggregate demand in country A.
D) there will be a fall in aggregate demand in country B.

Question

Quizplus · Accepted Answer

When consumer preferences shift away from country A's goods, demand for its currency decreases, leading to a depreciation. This makes country A's goods cheaper, potentially offsetting the reduction in aggregate demand.

If Two Countries, a and B, Have Separate Currencies and There