How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade?
A)An increase in the real exchange rate raises imports, reduces exports, and reduces the balance of trade.
B)An increase in the real exchange rate reduces imports, raises exports, and reduces the balance of trade.
C)An increase in the real exchange rate reduces imports, raises exports, and increases the balance of trade.
D)An increase in the real exchange rate raises imports, reduces exports, and increases the balance of trade.
E)An increase in the real exchange rate raises imports, raises exports, and increases the balance of trade.

Question

Quizplus · Accepted Answer

An increase in the real exchange rate means that the country's goods have become relatively more expensive compared to foreign goods. This makes imports cheaper and exports more expensive, resulting in higher imports and lower exports. Therefore, an increase in the real exchange rate raises imports, reduces exports, and reduces the balance of trade.

How Does an Increase in the Relative Price of a Country's