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.

Question

Quizplus · Accepted Answer

An increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, makes the country's exports more expensive for foreign buyers while making imports cheaper for domestic consumers. This leads to a decrease in exports, an increase in imports, and a reduction in the balance of trade. Therefore, option A is the correct choice.

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