When a country's real exchange rate rises:
A) exports will decrease but imports will be unaffected.
B) imports will decrease but exports will be unaffected.
C) exports will increase and imports will decrease.
D) exports will decrease and imports will increase.

Question

Quizplus · Accepted Answer

When a country's real exchange rate rises, its exports become more expensive for foreign buyers, which leads to a decrease in demand for the country's exports. At the same time, imports become cheaper for domestic buyers, which leads to an increase in demand for imports. Therefore, exports will decrease and imports will increase.

When a Country's Real Exchange Rate Rises