Figure 13-2
-Refer to Figure 13-2. If the economy were initially in equilibrium at r0 and E0 and the government removed import quotas, what would happen to the exchange rate?
A) It would appreciate to E1.
B) It would appreciate to E2.
C) It would depreciate to E1.
D) It would depreciate to E2.

Question

Figure 13-2 
-Refer to Figure 13-2. If the economy were initially in equilibrium at r0 and E0 and the government removed import quotas, what would happen to the exchange rate?
A) It would appreciate to E1. 
B) It would appreciate to E2. 
C) It would depreciate to E1. 
D) It would depreciate to E2.

Quizplus · Accepted Answer

With the removal of import quotas, there will be greater demand for foreign goods, leading to an increase in demand for foreign currency to pay for those goods. This will cause an increase in the supply of the domestic currency in the foreign exchange market, leading to a depreciation of the exchange rate from E0 to E2.

Figure 13-2 -Refer to Figure 13-2. If the Economy Were Initially in Were