Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

Question

Quizplus · Accepted Answer

If A's currency depreciates against B, then A's exports become cheaper for C and their demand should increase, resulting in an increase in A's exports to C. At the same time, A's imports from C become relatively more expensive, resulting in a decrease in A's imports from C.

Assume Countries A, B, and C Produce Goods That Are