How does an increase in a country's exchange rate affect its balance of trade?
A)An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade.
B)An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade.
C)An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade.
D)An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.
E)A country's exchange rate has no affect on its balance of trade.

Question

Quizplus · Accepted Answer

If a country's exchange rate increases, it means that its currency has become stronger. This in turn makes imported goods cheaper, thus increasing demand for imports. On the other hand, it makes exports more expensive, reducing demand for exports. This leads to a reduction in exports and an increase in imports, causing the balance of trade to decrease. Therefore, Option A is the correct answer.

How Does an Increase in a Country's Exchange Rate Affect