11) The quantity of imports will increase when there is A) a reduction in the re

Question

11) The quantity of imports will increase when there is A) a reduction in the real exchange rate. B) an increase in domestic output. C) an increase in foreign output. D) all of the above 12) Exports will decrease when there is A) an increase in the real exchange rate. B) an increase in domestic output. C) an increase in foreign output D) all of the above 13) Which of the following is true when a country is experiencing a trade surplus (NX> 0? A) Demand for domestic goods is equal to the domestic demand for goods. B) Demand for domestic goods is greater than the domestic demand for goods. C) Demand for domestic goods is less than the domestic demand for goods. D) A budget surplus exists 14) Which of the following will always cause an increase in net exports? A) a reduction in domestic output B) an increase in the real exchange rate C) an increase in government spending D) an increase in investment

Explanation / Answer

11. B) an increase in domestic output.

12. A) an increase in the real exchange rate.

14. A) a reduction in domestic output.

Note:If the real exchange rate is high (increases), the relative price of goods at home is higher (increases) as compared to the relative price of goods out of the country. Thus imports are likely since foreign goods are cheaper as compared to domestic goods. Consequently, if the real exchange rate is high (increases), net exports decrease while imports rise.

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