Figure 13-2

-Refer to the FigurE13-2. If the economy were initially in equilibrium at r0 and E₀ and the government removed import quotas, what would happen to the exchange rate?
A) It would appreciate to E₁.
B) It would appreciate to E₂.
C) It would depreciate to E₁.
D) It would depreciate to E₂.

Question

Figure 13-2
 
-Refer to the FigurE13-2. If the economy were initially in equilibrium at r0 and E₀ and the government removed import quotas, what would happen to the exchange rate?
A) It would appreciate to E₁. 
B) It would appreciate to E₂. 
C) It would depreciate to E₁. 
D) It would depreciate to E₂.

Quizplus · Accepted Answer

Removal of import quotas would lead to an increase in demand for foreign goods, which would lead to an increase in demand for foreign currency and consequently lead to a depreciation of the domestic currency. This is shown in the diagram by the movement from E₀ to E₂.

Figure 13-2 -Refer to the FigurE13-2. If the Economy Were Initially in Economy