When the real exchange rate rises
A) imports measured in terms of domestic output will rise.
B) imports measured in terms of domestic output will fall.
C) imports measured in terms of domestic output will never be affected.
D) imports measured in terms of domestic output may rise or fall.
E) imports measured in terms of foreign output will rise.

Question

Quizplus · Accepted Answer

When the real exchange rate rises, it becomes more expensive for the domestic economy to purchase foreign goods, which may lead to a fall in imports. However, if the rise in the real exchange rate is due to an increase in the productivity of the domestic economy, then its income and demand for imports may also increase, leading to a rise in imports. Therefore, imports measured in terms of domestic output may rise or fall depending on the underlying factors affecting the real exchange rate.

When the Real Exchange Rate Rises