If Australians develop an increased preference for foreign goods, how will the exchange rate for the dollar respond in the long run, ceteris paribus?
A)Exchange rates will rise.
B)Exchange rates will fall.
C)Exchange rates will be unaffected by changes in the preference for imported goods by Australians, both in the short run and in the long run.
D)The exchange rate will be affected in the short run, but not in the long run.

Question

Quizplus · Accepted Answer

If Australians increase their preference for foreign goods, they will need more foreign currency to pay for those imports. This increased demand for foreign currency will lead to a decrease in the value of the Australian dollar in the long run, as the supply of Australian dollars will increase relative to the demand. This decrease in the exchange rate will make imports more expensive, which may decrease further Australian demand for foreign goods in the long run.

If Australians Develop an Increased Preference for Foreign Goods, How