If one country is hit with a shock that increases the value of its currency and causes its net exports to decline and the net exports and income of other countries to rise, then the business cycle is being transmitted internationally through _____effect.

Question

Quizplus · Accepted Answer

An increase in the value of a country's currency would be a result of an appreciation in its exchange rate. This could lead to a decline in net exports as domestic goods become relatively more expensive to foreign buyers, causing the business cycle to be transmitted internationally through an exchange-rate effect. A trade effect might arise if the shock led to changes in tariffs or quotas, but this is not specified in the question. An interest-rate effect could also be a transmission channel, but this would likely depend on why the shock affected the exchange rate. An expected-inflation effect is not relevant in this context.

If One Country Is Hit with a Shock That Increases