Final answer:
An increase in the nominal exchange rate typically results in more expensive exports and cheaper imports, leading to a potential decrease in exports and increase in imports. Additionally, a rise in supply in the financial market typically leads to a decrease in interest rates and an increase in the quantity of loans made and received.
Step-by-step explanation:
In the long run, an increase in the nominal exchange rate implies that the value of the currency has appreciated. This makes exports more expensive for foreign buyers and thus may lead to a decrease in exports (B). Conversely, an appreciated currency makes imports cheaper for domestic consumers, potentially leading to an increase in imports (C).
However, exchange rates can fluctuate and affect trade balances in complex ways, as the cost benefits to consumers and the conversions back to local currency by foreign companies must also be taken into account. Additionally, a decline in interest rates in the financial market is most likely to happen due to a rise in supply (C), while an increase in the quantity of loans made and received can also be attributed to a rise in supply of capital in the financial markets (C).
This makes imported goods relatively cheaper for consumers in the country with the stronger currency. As a result, people are likely to buy more imported goods, leading to an increase in imports.
For example, if the exchange rate between the US dollar and the Japanese yen increases, it means that the US dollar has become stronger compared to the yen. This would make Japanese goods cheaper for American consumers, leading to an increase in imports from Japan.