Suppose there is a real exchange rate appreciation. This real appreciation is more likely to cause a decrease in net exports when:

Question

Quizplus · Accepted Answer

When exports and imports are relatively sensitive to price changes, a real appreciation would cause the price of domestically produced goods to increase in foreign markets, reducing demand for exports. At the same time, the price of foreign goods would decrease in the domestic market, increasing demand for imports. This would lead to a decrease in net exports.

Suppose There Is a Real Exchange Rate Appreciation