Asked by marissa ciavatta on Jun 15, 2024
Verified
Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign-currency exchange curve.
Foreign-Currency Exchange
The conversion of one country's currency into another's, a key process in international trade and investments.
Net Exports
The disparity between what a nation exports and what it imports in total.
- Perceive the linkage among real interest rates, net capital exports, and foreign exchange rates.
Verified Answer
IC
Iyanna ClarkeJun 17, 2024
Final Answer :
When the domestic real exchange rate appreciates, domestic goods become more expensive relative to foreign goods. This induces domestic residents to buy more goods overseas, which increases imports. The appreciation also induces foreign citizens to buy fewer domestic goods, so exports fall. The decline in exports and increase in imports decrease net exports, and so the demand for domestic currency declines. The inverse relation between the exchange rate and the quantity of domestic currency demanded in the market for foreign-currency exchange is represented by the downward-sloping demand curve.
Learning Objectives
- Perceive the linkage among real interest rates, net capital exports, and foreign exchange rates.