Answered: What effect does a high exchange rate…

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter18: Trading With Other Nations

Section: Chapter Questions

Problem 12AA

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What effect does a high exchange rate have on imports, exports, and that country's production?

Expert Solution

Step 1

The rate that measures the value of a nation’s currency in terms of another nation’s currency is known as the exchange rate. It depicts the total units of foreign currency that can be bought with a single unit of domestic currency.

Step 2

When the exchange rate rises, the value of domestic currency in relation to foreign currency increases. This is known as appreciation of currency.

Step 3

A higher exchange rate makes goods produced in the domestic country expensive. Thus, the demand of domestic goods falls, leading to fall in exports as well.

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