An appreciation of a country's currency
A) decreases the relative price of its exports and lowers the relative price of its imports.
B) raises the relative price of its exports and raises the relative price of its imports.
C) lowers the relative price of its exports and raises the relative price of its imports.
D) raises the relative price of its exports and lowers the relative price of its imports.
E) raises the relative price of its exports and does not affect the relative price of its imports.

Question

Quizplus · Accepted Answer

When a country's currency appreciates, it means that it has increased in value relative to other currencies. This increase in value would result in a higher relative price of its exports, as they become relatively more expensive to foreign buyers. At the same time, it would lower the relative price of its imports, as they become relatively cheaper for domestic buyers. This would lead to an increase in demand for domestic goods and a decrease in demand for foreign goods, which would contribute to a reduction in the trade deficit. Therefore, the best choice is D.

An Appreciation of a Country's Currency