A reduction in the real exchange rate will cause
A)a reduction in net exports.
B)a reduction in the quantity of imports.
C)a reduction in output.
D)an increase in government spending.
E) all of the above

Question

Quizplus · Accepted Answer

A reduction in the real exchange rate makes domestic goods cheaper relative to foreign goods. This typically leads to a decrease in imports (since domestic goods become more attractive) and an increase in exports (since foreign buyers find domestic goods cheaper), but the question specifically mentions a reduction in the quantity of imports.

A Reduction in the Real Exchange Rate Will Cause