Question

When the real exchange rate rises:

A) exports will decrease but imports will be unaffected.
B) imports will decrease but exports will be unaffected.
C) exports will increase and imports will decrease.
D) exports will decrease and imports will increase.

Answer 1

When the real exchange rate rises D) exports will decrease and imports will increase.

Step-by-step explanation:

Exchange rate -

Exchange rate is defined as the number of unit of one of the currency exchangeable for the one unit of another .

The change in the exchange rates can alter the international price of the goods as -

Hence ,

If the value of dollar exchange rate rises , the relative price of the domestic goods will also rise while the relative price of the foreign goods and services will reduce .

Therefore ,

The change in relative prices will reduce U.S. exports and rises its imports.