An increase in the real exchange rate will
A)raise national income
B)lower national income
C)make a country less competitive in international trade
D)lower the cost of foreign goods
E)c and d

Question

Quizplus · Accepted Answer

An increase in the real exchange rate means that a country's currency has appreciated in value relative to other currencies. This makes the country's goods more expensive for foreign buyers, making it less competitive in international trade (option C). On the other hand, it also means that foreign goods become relatively cheaper for domestic buyers (option D). The net effect on national income is not clear-cut and depends on other factors such as the elasticity of demand for domestic and foreign goods. Therefore, options A and B are not correct.

An Increase in the Real Exchange Rate Will