Suppose that the European Union experiences a recession and this causes a decline in income in the European Union relative to Australia. Because of this, the dollar will, ceteris paribus:
A)appreciate, and Australian net exports will fall.
B)depreciate, and Australian net exports will rise.
C)appreciate, and Australian net exports will rise.
D)depreciate, and Australian net exports will fall.

Question

Quizplus · Accepted Answer

The correct answer is B because a decline in income in the European Union relative to Australia will lead to a decrease in demand for Australian exports, causing Australian net exports to fall. To offset this, the dollar will depreciate, making Australian exports cheaper and more competitive in the global market, leading to an increase in Australian net exports.

Suppose That the European Union Experiences a Recession and This