Question

When exchange rates change:

A. U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
B. U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
C. U.S. firms that produce domestically and sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations.
D. U.S. firms that produce domestically and sell only to domestic customers will be unaffected, and U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.

Answer 1

The correct answer is option B.

Step-by-step explanation:

The changes in the exchange rate will affect those domestic firms that sell their products in the foreign market or those domestic firms that produce and sell domestically but has foreign companies as competitors.

If the exchange rate falls, the price of domestic firms will decline as compared to imports. This will create more demand for domestic goods.

If the exchange rate increases domestic goods will become costlier and imports will become cheaper. This will increase the demand for imports.