Suppose that Australia imposes an import quota on coal. The quota makes the real exchange rate of Australian dollar
A)appreciate but does not change the real interest rate in Australia.
B)appreciate and the real interest rate in Australia increase.
C)depreciate and the real interest rate in Australia decrease.
D)depreciate but does not change the real interest rate in Australia.

Question

Quizplus · Accepted Answer

Imposing an import quota on coal reduces the supply of coal in Australia from international markets, potentially increasing its price. This can lead to an increase in demand for Australian dollars to pay for the more expensive, now limited coal imports, appreciating the real exchange rate. The effect on the real interest rate is not directly influenced by the quota itself, as it is more closely tied to monetary policy decisions.

Suppose That Australia Imposes an Import Quota on Coal