Explain how does an increase in the real exchange rate affect ...

[lak]

Explain how does an increase in the real exchange rate affect exports and imports?
 
  What will be an ideal response?

Question 2

Refer to above figure. Given a tariff of 3 per unit, what is the country's consumer surplus?
 
  What will be an ideal response?

[tsternbergh47]

Answer to Question 1

When the real exchange rate increases, domestic products are cheaper relative to foreign products. Due to this, exports increase as foreigners demand more of our exports. The change in imports is ambiguous because fewer units of imports are purchased (the volume effect), but each foreign unit is now more expensive (the value effect). Remember: exports and imports are measured in terms of domestic output, i.e. dollar value, not volume of units. However, we often assume that the volume effect outweighs the value effect, so that imports decrease when the real exchange rate rises.

Answer to Question 2

320

[lak]

Excellent

[cpetit11]

TYSM