Suppose that in response to a severe recession a country with an overvalued curr

Question

Suppose that in response to a severe recession a country with an overvalued currency and a fixed exchange rate does, in fact, move to a floating exchange rate system. This move to a floating exchange rate will cause the exchange rate to:

a)appreciate, so that exporters and firms that compete against imports are the losers as their products now become more expensive and more competitive against foreign goods.

b)appreciate, so that exporters and firms that compete against imports are the winners as their products now become cheaper and more competitive against foreign goods.

c)depreciate, so that exporters and firms that compete against imports are the winners as their products now become cheaper and more competitive against foreign goods.

d)depreciate, so that exporters and firms that compete against imports are the losers as their products now become more expensive and more competitive against foreign goods. WRONG

Explanation / Answer

c) depreciate, so that exporters and firms that compete against imports are the winners as their products now become cheaper and more competitive against foreign goods.

When the economy will move towards floating exchange rate, its currency will depriciate to reach normal level. This will increase their exports and exporters will win.

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