Question

What determines the exchange rate? If a nation's currency appreciates in the foreign market, how will this impact net exports? Explain.

Answer 1

The demand and supply of the currency in the market determines the exchange rate in the market. If the demand for a currency is high in the market then the exchange rate for that currency will increase i.e. that currency will appreciate in the market. If the supply is more than that currency will see a fall in the value i.e. that will depreciate in the market.

if the national currency appreciates in the market then the exports will fall and the imports of the nation will increase that will lead to a fall in the net exports.