If a home country depreciates or devalues its currency by 10 percent, and if there is "complete pass-through" as well as horizontal supply curves of exports and imports, then The price of the country's exports in terms of foreign currency will __________ and the Price of the country's imports in terms of home currency will __________.

Question

Quizplus · Accepted Answer

If a country's currency is devalued by 10 percent, then the price of its exports in terms of foreign currency will fall by the same amount (10 percent) since they will now be relatively cheaper. On the other hand, the price of the country's imports in terms of home currency will rise by 10 percent because the imports will now be more expensive to purchase with the devalued currency. This is assuming there is "complete pass-through" (meaning that changes in exchange rates are fully passed on to prices) and horizontal supply curves of exports and imports (meaning that the quantities supplied and demanded are unresponsive to changes in prices).

If a Home Country Depreciates or Devalues Its Currency by 10