An appreciation of the Australian real exchange rate:
A)reduces the quantity of dollars demanded in the market for foreign-currency exchange
B)makes Australian goods become more expensive relative to foreign goods
C)makes Australian goods more attractive to consumers at home and abroad
D)reduces Australian exports and increases Australian imports

Question

Quizplus · Accepted Answer

An appreciation of the Australian real exchange rate makes Australian goods more attractive to consumers at home and abroad. This is because Australian goods become cheaper compared to foreign goods, which may increase demand for Australian products both locally and internationally. The other options are incorrect because an appreciation of the exchange rate would not reduce the quantity of dollars demanded, but rather reduce the quantity of Australian dollars demanded. It would also make Australian goods more expensive relative to foreign goods, which would decrease demand for Australian goods abroad and increase demand for foreign goods in Australia. Finally, an appreciation of the exchange rate would decrease Australian exports and increase Australian imports, which would not have a positive impact on the economy.

An Appreciation of the Australian Real Exchange Rate