Data on the relationship between the U.S. multilateral real exchange rate and the U.S. trade balance show:
A) a surprising result that the decrease in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
B) a predictable result that the increase in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate.
C) a correlation that is so weak it cannot be used to support the theory that the trade balance is related to the real effective exchange rate of the U.S. dollar.
D) a surprising result that the increase in the U.S. trade balance occurs with a decrease (appreciation) in the real effective exchange rate of the dollar.

Question

Quizplus · Accepted Answer

The increase in the trade balance being correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate is predictable because a weaker dollar makes U.S. exports cheaper and imports more expensive, potentially improving the trade balance.

Data on the Relationship Between the U