If depreciation of a home currency occurs, foreign exporters to the home country could offset some of the impact of the depreciation by __________ the price/cost ratio on goods sent to the home country; such a change in the price/cost ratio would mean that there was _________ "pass-through" of the exchange rate change to foreign export prices.

Question

Quizplus · Accepted Answer

If the foreign exporters decrease the price/cost ratio on goods sent to the home country, it means that they are absorbing some of the impact of the depreciation. However, this does not mean that there is complete pass-through of the exchange rate change to foreign export prices because the foreign exporters are reducing their profit margins in doing so. Therefore, the best choice is B, which states that the foreign exporters could offset some of the impact of the depreciation by decreasing the price/cost ratio on goods sent to the home country, and that there would be less-than-complete pass-through of the exchange rate change to foreign export prices.

If Depreciation of a Home Currency Occurs, Foreign Exporters to the Home