If the exchange rate appreciates, what is likely to happen to exports and the current account in the short term?

If the exchange rate appreciates, what is likely to happen to exports and the current account in the short term?

• A. Exports become cheaper for foreign buyers, increasing exports.
• B. Exports become more expensive for foreign buyers, reducing export demand and potentially worsening the current account.
• C. There is no effect on trade.
• D. Both exports and imports rise equally.

Answer: (B)

When the exchange rate appreciates, the domestic currency strengthens relative to foreign currencies. This makes domestically produced goods more expensive for buyers overseas, so demand for exports falls in the short term. At the same time, imports become cheaper for domestic buyers, which tends to lift imports. Net exports (exports minus imports) therefore fall, and the current account can worsen in the short term. The idea is that higher foreign prices for our goods reduce export demand, while cheaper foreign goods boost imports, shifting the balance against us.

When the exchange rate appreciates, the domestic currency strengthens relative to foreign currencies. This makes domestically produced goods more expensive for buyers overseas, so demand for exports falls in the short term. At the same time, imports become cheaper for domestic buyers, which tends to lift imports. Net exports (exports minus imports) therefore fall, and the current account can worsen in the short term. The idea is that higher foreign prices for our goods reduce export demand, while cheaper foreign goods boost imports, shifting the balance against us.