The TB (i.e., X - M) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (a real depreciation) of the home nation's exchange rate?
A) Consumers in the home nation would find it more expensive to buy domestic goods compared with foreign goods, and the TB would decrease.
B) Consumers in the home nation would cut back on both domestic and foreign goods and the TB would decrease.
C) Consumers in the home nation would increase spending on both domestic and foreign goods, and the TB would be unchanged.
D) Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the TB to increase.

Question

Quizplus · Accepted Answer

An increase (a real depreciation) in the home nation's exchange rate makes domestic goods cheaper relative to foreign goods. This encourages consumers in the home nation to buy more domestic goods and fewer foreign goods, improving the trade balance (TB) as exports (X) increase and imports (M) decrease.

The TB (IE