Tut #20 - Exchange Rates (Answers) Deb - 21jan2014

HWA CHONG INSTITUTION
Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III Balance of Payments, Exchange Rates & International Economics
TUTORIAL #20: EXCHANGE RATE SYSTEMS & POLICIES

Section A: Complete BEE questions in Chapter #19 lecture notes
Pls see answers at the end of lecture notes in tutors copy.

Also, pls go through any concepts or clarifications for this topic.
You may proceed to complete the tutorial if the pace of your class is fast.
Section B: Data Handling Practice

Question 1: DHS 2012 Prelims
Table 4: Selected economic indicators of China, 2007 2010
Year
2007
2008
2009
GDP (constant 2000, US$ billion)
2456.7
2692.5
2940.2
Nominal interest rate (%)
4.7
3.6
5.2
Nominal exchange rate (yuan per US$)
7.77
6.83
6.83
Real effective exchange rate (REER) index,
105.6
115.3
119.2
2005 = 100
Big Mac price in China (yuan)
11.0
12.5
12.5
Big Mac price in US (US$)
3.22
3.57
3.57
Average hourly wages (in US$)
1.06
1.36
1.62
Gross domestic savings (% of GDP)
50.5
51.8
52.7
Composition (% of GDP)
Private consumption
Gross fixed capital formation
Government consumption
Exports of goods and services
Imports of goods and services
(a)
(i)
2010
3246
2.5
6.78
118.7
13.2
3.73
1.84
51.7
%
36.0
39.1
13.5
38.4
29.6
34.9
40.8
13.3
35
27.3
33.9
46
13.4
26.7
22.3
35
45.4
13.4
29.6
25.6
Source: Various
Describe the trend in Chinas real effective exchange rate between 2007 and 2010.
Note to tutors: This is a typical trend reading question

1m General trend. 1m Trend refinement
Students need to learn to use the correct description for exchange rates appreciate or
depreciate. NOT increase or decrease.
1m Trend refinement
General trend: Chinas REER has increased which implies that Chineseinas yuanREER
has appreciated from 2007 to 2010.
Refinement: If given index number, should calculate
Appreciate by 12.4% from 2007-2010 OR
Hwa Chong Institution. All Rights Reserved. Tutors Copy
[2]

Appreciate at a falling rate between 2007 and 2010. (too time-consuming to

calculate) OR
There was a slight depreciation from 2009-2010. (though accepted as it wasnt so
significant, the 1st 2 points are preferred)

(ii
)
With reference to Table 4, is the yuan undervalued or overvalued against the U.S. dollar? Explain.
This question tests candidates understanding of the term undervaluation (See Chap #19 Bee Qn) and
ability to select and process information, specifically to calculate the PPP exchange rate using the Big Mac
index as an approximate value.
Identification [1]: The yuan is undervalued against the US$. [1]
Reason and reasoning using evidence in Table 4 [2]:
Method 1 (easiest method)
The PPP exchange rate (ER) is calculated as a ratio of the price of a basket of goods and services
in one currency against the price of that same basket of goods and services in another currency. In
this case, PPP is calculated as:
price of Big Mac( Yuan)

price of Big Mac( US $)
PPP ER of US in yuan =
Big Mac price in China (yuan)

Big Mac price in US (US$)
PPP exchange rate (yuan per US$)*
(calculated)
Nominal exchange rate (yuan per US$)
11.0
3.22
12.5
3.57
12.5
3.57
13.2
3.73
3.42
3.5
3.5
3.54
7.77
6.83
6.83
6.78
* There is no need to show all the working of the PPP ER values for all the years.
The numerical value of the PPP ER of yuan against US$US in yuan (using the Big Mac Index) is
consistently lower than the nominal ER. This means that at the PPP ER, every 1 US$ can be
exchanged for less yuan, unlike at the nominal ER, where every 1 US$ can be exchanged for more
yuan. Hence, at the PPP ER, the yuan would have been a much stronger currency against the
US$ than the nominal ER, which indicates that the yuan is undervalued against the US$. E.g.
in 2010, the Big Mac Index measured 3.54 yuan per US$ compared to the nominal ER of 6.78 yuan
per US$.
Method 2
In 2007, one Big Mac in China costs 11 yuan, while it costs US$ 3.22 in US. Using the nominal
exchange rate, one Big Mac should have cost 25 yuan instead of 11 yuan, which is about 2.27
times more than what it should have been priced at. This trend continues between 2008 and 2010,
where the Big Mac is consistently priced at about 2 times lower than what it should have been in
China. This means that for a given income, after converting into the respective currencies based on
the nominal exchange rate, Chinese citizens are actually able to exchange about 2 times more of
Big Mac than US citizens, implying that the nominal exchange rate of USyuan against yuan USD is
of a higher lower value than what it should have been. (Also implies that nominal exchange rate of
yuan against USD is of a lower value that what it should have been) This signifies that the yuan is
[3
]

undervalued against the dollar. [2]
Additional note to students for understanding (NOT required for question)

Limitations: using the PPP to calculate if the yuan is undervalued against the dollar is not a very accurate
method, since PPP only applies to tradable goods, and a Big Mac is not tradable. In fact, the value of a Big
Mac comes not from the hamburger itself, but the services associated with the hamburger. These include the
wages of employees serving the Big Mac and the rent of the restaurant in which it is eaten, both of which are
determined by local factors. Since the hamburger itself is the only tradable portion of the Big Mac, only a
small fraction of the Big Macs value should be determined by PPP.

Question 2: SAJC 2012 Prelims

Table 1: Annual Exchange Rate of the Pound and the Euro
/USD
EURO/USD
2008
0.5447
0.6832
2009
0.6409
0.7190
2010
0.6473
0.7546
2011
0.6235
0.7188
Source: US Federal Reserve Board, 2011
(a)
(i)
Compare between the yearly exchange rate of the UK pound per US dollar and of the
Euro per US dollar during the period from 2008 to 2011.
[2]
Suggested answer:
Both the UK pound (14.5%) and the Euro (5%) depreciated against the US dollar
from 2008 to 2011 (1).
However, the UK pound has depreciated more than the Euro (1). [or]
The UK pound has consistently been stronger than the Euro i.e. 1 USD can buy more
Euro compared to UK pound throughout 2008 to 2011 (1).
SAJCs answer Why we dont accept.
Possible similarity 1:
From 2008 to 2010, both pound and Euro depreciated since the amount of GBP per
USD and Euro per USD increased, thus reflecting a fall in external purchasing power
of both pound and Euro.(no need to explain)
Possible similarity 2:
However, in 2011 (only look at a single year), both pound and Euro appreciated
against USD since the amount of GBP and Euro per USD decreased.
Difference:
In 2009 (only look at a single year), UK pound depreciated to a greater extent
compared to Euro against USD.
(ii)
With the aid of a diagram, explain the possible reasons for the change in the
exchange rate of the UK pound in 2010.
Even without the case material, since the question asks for possible reasons, it is
still fine to give generic answers that affect the bilateral exchange rate between UK
and US.
State: UK pound depreciated slightly against USD in 2010.
Reasons:
[4]

(1) A fall in demand for pounds:

2009 2010: Subprime mortgage crisis in US leading to slow growth in US.
Assuming US had a slower growth relative to the UK, this would mean the
Americans would buy lesser British exports.
When demand for British exports fell, the derived demand for UK pounds
would fall also, leading to the depreciation.
(2) A rise in supply for pounds
At the same time, the Britishs income was higher than the US, the British
would buy more American exports and thus they had to sell pounds for USD.
This led to a rise in supply of pounds and caused it to depreciate.
Figure 1
Price of in USD
S
S1
P1
P2
D
D1
Quantity of
Suggested answer (with full case material)

Identify change: UK pound has depreciated against USD.Identify change: depreciation of exchange rate
Reason 1: Table 2 shows worsening of current account of UK from 2009 -2010
Worsening current account would mean that there is increasing net outflow which translates to increase in
supply of UK pounds and/or fall in demand of UK pounds.
Reference to diagram: This could suggest a rise in SS of pound in the forex market from SGBP to S1GBP.
Since pound depreciated, it is likely that both the fall in DD for and rise in SS of pound reinforced each
other and led to a depreciation of pound.
Reason 2: Extract 6 describes a loss of confidence in UK pounds
Loss of confidence in UK pounds will lead to selling of UK pounds as mentioned in Extract 6 para 1 that
they (investors) would prefer to move into a different currency.
In addition, there would also be a fall in demand for UK pounds due to the lack of confidence, Extract 6
para 2 investors continue to flee the currency.
Reference to diagram: With reference to Fig 1, this had led to a fall in demand for pound from DGBP to D1GBP

Question 3: ACJC 2012 Prelims

Figure 2: Chinese Yuan (CNY) per Brazilian Real (BRL)
Price of
BRL in
CNY
Time
Source: Yahoo.com 2012
Year
2008
Table 3: Brazil-China Trade Balance (USD Millions)

Exports to
Share
Imports
Share
Bilateral
China(A) relative to
from
relative to
Trade
total
China (B)
total
Flow
exports
imports
(A+B)
(%)
(%)
16523
8.3
20044
11.6
36567
Net
Exports
(A-B)
-3522
2009
21004
13.7
15911
12.5
36915
5093
2010
30786
15.2
25593
14.1
56379
5193
2011
28160
15.6
23420
14.1
51580
4740
Source: Brazilian Ministry of Development, Industry and Foreign Trade, 2012
(a)
With reference to Figure 2 and Table 3,

(i)
State the trend of the Brazilian Real against the Chinese Yuan between January
2009 and January 2011.
[1]
Brazilian Real It has apdepreciated against the Chinese yuan from Jan 2009 to Jan
2011..
(ii)
Describe the trend of Brazils trade balance with China from 2009 to 2011.
Brazils trade balance with China has always been in a surplus from 2009 to
2011.
However, the trade balance surplus has decreased generally from 2009 to 2011
and hence its position has worsened.
Note to tutors: 3 year period is too short for description of trend.
[2]

(iii)
In the light of the above trends, explain how the change in exchange rate has
affected Brazils trade balance with China.
As Brazilian Real depreciated against the Chinese yuan, the price of Brazilian
exports decreases in Chinese yuan and the price of Chinese imports increases in
Brazilian real. If the demand for exports and imports is price elastic, the total
revenue from Brazilian exports will increase and Brazils import expenditure from
China will decrease. Hence it explains the consistent trade surplus Brazil has.
This first answer is not acceptable because the focus is about how the BOT
has changed rather than about it being in consistent trade surplus. Moreover,
with depreciation, the BOT should improve (if ML condition holds), but the
stats from 2009-2011 showed a worsening.
As the Brazilian real has generally appreciated against Chinese yuan from Jan 2009
to 2011, this causes price of Brazilians exports in yuan to be relatively more
expensive and imports to be relatively cheaper in Brazilian real. Assuming MarshallLerner condition holds (|PEDx+PEDm|>1), net exports will decrease generally over
the same period. OR
Although the Brazilian real has depreciated and this causes the price of export in
foreign currencies to be lower, it is not enough to compete with the relatively lower
priced goods in China due to Chinas comparative advantage in the production of
goods and services. Hence it explains why Brazils trade balance with China has
worsened.
Note to tutors: This question can be a potential 4 marks question (provided it shows
>4 years trend). Students may recognize that although Brazilian real has
appreciated from Jan 2009 to Jan 2010, there is still an increase in its trade balance
over the same period. Ask the students to explain the possible reason(s).
[2]

Section C: Essay Practice

Question 1: TYS 2006 Q6
In October 2005 the Monetary Authority of Singapore stated that its policy of allowing the
Singapore dollar to strengthen against a basket of currencies would be maintained.
(a) Using a diagram, explain what might cause a countrys exchange rate to appreciate in a
floating exchange rate system.
[10]
(b) Discuss the extent to which problems are likely to result from an appreciation of
Singapores exchange rate.
[15]
Key Points from the Examiners Report:
(+)
(-)
Unable to elaborate the factors well.
Use appropriate supply and demand analysis within

correctly drawn and, of equal importance, welllabelled diagrams.
Top answers explained the underlying reasons for
both demand and supply side movements that would
lead to an appreciation of the currency.
The most common error was to argue that contractionary

monetary policy would reduce the supply curve of a
currency.
(a)
Note: There is no need to use SG as example. Students can choose to use another context and may even choose
different context for different factors that results in appreciation of a currency.
Simple Schematic Plan

INTRODUCTION
BODY
Explain how an appreciation occurs in a free floating system using demand and supply analysis:
demand increases or supply falls or both
Note: Should students choose Sg as eg, student should understand that SG is using managed float exchange
rate system. However, we can still accept the answer as we are assuming that S$ appreciates within the
exchange rate band such that MAS will not intervene
Explain the underlying reasons for demand and supply to shift
CONCLUSION
INTRODUCTION (USE KIA)

Key Words
The exchange rate of a currency refers to its value measured/expressed in terms of a foreign
currency (or another currency). A currency appreciation occurs if its value increases relative to a
Exchange
foreign currency. This means the same unit of the currency can now be exchanged into more
Rate/Appreciation/ foreign currency.
Floating System
In a floating exchange rate system the value of a currency is determined purely by the forces of
demand & supply and there is no government intervention to manage or fixed the exchange rate
at pre-determined levels.
Issue
There are key underlying factors that determine demand and supply of a currency in the foreign
Approach
exchange market which shall be elaborated on these key determinants.
BODY
Basic Demand and Supply Principle

The equilibrium rate in a floating exchange rate system is determined by the demand & supply of currency. An
appreciation of a currency will be caused by the increase in demand of currency or a fall in supply of currency or
both.
FC foreign currency, DC Domestic Currency, Ddm Demand for domestic currency, Sdm Supply of domestic currency
The demand for a foreign currency is a derived demand. This means the demand for a foreign currency comes from
the need to exchange one currency into a into another for 2 key purposes:
Trade: Domestic currency must be exchanged into foreign currencies to pay for foreign goods. For example, to
pay for Singapore exports foreigners will need to exchange their currencies into SGD thus creating demand for
our currency. Similarly, Singapore buyers of foreign goods would need to exchange SGD into foreign currencies
e.g. RM to shop in JB, Malaysia. With reference to figure 1, the demand curve for a currency will shift
rightwards if there is an increased in the demand for the countrys exports. Ceteris paribus, the currency
will appreciate.
Foreign investment: The domestic currency has to be changed into foreign currencies to purchase foreign
assets such as bonds and equities; deposit money in foreign banks and invest in foreign property or
businesses. With reference to figure 1, if there is an increased in inflow of FDI the demand curve for the
domestic currency will shift rightwards causing the value of the currency to appreciate in the foreign
exchange market.
Supply
On the other hand, a fall imports would mean a fall in supply of the domestic currency in the foreign exchange market.
This is because less domestic currency is supplied because less is needed to be exchanged into foreign currencies to
pay for imports. Thus with reference to figure 2, the supply curve for DC would shift to the left.
The Leftward shift of the supply curve causes the currency to appreciate. Similarly a fall in outflow of FDI would
result in a leftward shift of the supply curve for the domestic currency in the foreign exchange market.
However, there are underlying factors that influence both the trade and investment flows and hence the demand and
supply for the currency in the foreign exchange market.
These key underlying determinants include:
Fall in inflation rate relative to the countrys trade partners
Rise in interest rates relative to rest of the world
Anticipation of exchange rate changes (i.e. currency speculation)
1.Fall in inflation rates relative to
trade partners
2. Rise in interest rates relative to

rest of the world
3. Anticipations of an exchange rate

rise
A fall in Singapores inflation rate

relative to UK will cause
Singapores exports to be relatively
cheaper.
If the interest rates in Brazil rise

relative to those in foreign
countries, other countries
residents would be induced to
deposit their funds here to earn the
higher rate of interest.
When foreign exchange dealers,

importers and exporters expect or
speculate a rise in the exchange rate of
a countrys currency (e.g. USD) in the
near future, they will buy the currency
now before the exchange rate actually
rises.
UK residents will demand more of

Spores exports (Dd for S$
increases, SS of increases). At
This causes an increase in the
10

the same time, Spore will import

less goods & services from UK, as
they are now more expensive.
(SS for S$ falls, dd for falls.)
Ceteris paribus, the SING$ will
appreciate against .
demand for the Brazilian real

At the same time, Brazilians would
be discouraged to deposit their
funds in elsewhere. This causes
the supply for the Brazilian real
to fall. As a result, yuan will
appreciate vis-a-vis foreign
currencies.
The demand for the currency (E.g.

USD) will rise.
At the same time, those who want to
sell the currency will wait until the rate
of exchange rises, as anticipated.
This means that the supply for the
currency (E.g. USD) will fall.
Ceteris paribus, the currency (e.g. USD)
will appreciate.
CONCLUSION
In a free market such as a pure floating exchange rate system where there is no government intervention, the price or
value of a currency will appreciate if the demand rises or supply falls or both until it reaches a new equilibrium level.
(b)
Key Points from the Examiners Report:
(+)
Use appropriate economic analysis, such as the
Marshall-Lerner condition, to explain and discuss
whether an appreciation might or might not lead to
problems for the Singapore economy.
Showed very clear understanding of the benefits for a
small island economy of a controlled appreciation in
terms of the cost implications for imported goods.
Must have at least two Key Performance Indicators and
link to an appreciating currency.
(-)
Unexplained or underdeveloped statements about the
possible impact of an appreciation of the currency without
applying to Singapores context. These were usually
assertions that export prices would rise and hence that
there would be an ensuing balance of payments deficit.
Simple Schematic Plan

INTRODUCTION
BODY
Thesis Statement: Potential Macroeconomic problems Antithesis Statement: However, Macroeconomic
may result from an appreciation of Spore exchange rate.
problems are not likely to result from an appreciation of
Spore exchange rate.
Worsening of the BOP as BOT and FDI will fall
BOP may not worsen as BOT and FDI may
not fall
Slower growth and higher unemployment
May reduce demand-pull and import-price
push inflation
CONCLUSION
Suggested Answers
INTRODUCTION
The Singapore government has adopted a gradual and modest appreciation policy as the key macro-economic policy to
achieve non-inflationary economic growth. This essay seeks to discuss the impact or potential macro-problems such as
BOP deficit, slowdown in economic growth related to appreciation or the strong currency policy.
Thesis Statement 1: An appreciation of SGD may lead to
a worsening BOP position.
Antithesis Statement: An appreciation of SGD may

not lead to a worsening BOP position.
11

(1) Current Account Worsen due to fall in BOT
(1) BOT may not be worsened
An appreciation of the exchange rate likely to result in

worsening balance of trade.
Often in the short-run, demand tends to be relatively

price inelastic for exports and imports. This is because
both domestic and foreign consumers require some time
to react to price changes. There might also be
contractual agreements which prevent other countries
from switching away from Singapores exports. Thus
Marshall-Lerner condition is not satisfied and BOT will
not be worsened.
Assuming demand for exports is price elastic (justify):

Px (in foreign currency) rises, Qx falls more than
proportionate
X in foreign currency will fall.
Assuming demand for imports is price inelastic (justify)
Pm (in domestic currency) drops, Qm rises less than
proportionate
M in SGD will fall.
Note: To see the impact on BOT, there is a need to have
both X and M in SGD. 2 ways to do it:
1. Convert the X in foreign currency to SGD and since it
is an appreciation which means need more foreign
currency to buy the same amount of SDG, X in SGD
will indeed fall.
2. Or, Qx in foreign currency falls (regardless its price
elastic or inelastic) will mean a fall in demand for
Singapores exports in SGD and thus shrink the X in
SGD.
To sum up: X M = BOT will be worsened if X> M
And this is indeed the case if Marshall-Lerner
condition which is the sum of elasticities of
exports and imports are greater than 1.
Furthermore competitiveness of our exports is not

dependent on pricing alone but on quality as well. In fact,
Singapore has been using supply-side policies together
with exchange rate to ensure our exports stay
competitive in both pricing and quality, making our
exports to be highly price-inelastic.
Evaluation
Not all sectors are affected equally. Export sectors with
high import content are likely to benefit from a stronger
dollar but service sectors with low import content such as
the tourism sector might suffer. The counterargument is
that the export of services is dependent on other factors
not just price alone. For example, for the tourism medical
sector, people might be willing to pay more for medical
services in Spore for more reliable medical procedures.
Evaluation
The high import content of Singapores exports means that a
stronger dollar will result in lower cost of production. One
such export would be that of oil refined products. Thus the
rise in price of exports due to the appreciation is offset by the
fall in prices of imports such as raw material.
(2) A strong SGD may not deter FDI
(2) Financial Account worsens due to fall in FDI
A stronger $S may deter foreign investors. Why? Make it
more expensive to do business in Singapore thus MNCs e.g
from USA might be inclined to choose other cheaper Asian
locations.
So far Singapore has been able to attract sufficient

Foreign Direct Investment (FDI) to fuel economic growth.
Foreign investors are attracted to invest here if there is
confidence in the economy and good economic outlook.
This is bolstered by the appreciating S$. A strong
currency inspires confidence in the economy. Investors
are confident of making good returns/profits.
Evaluation:
A strong currency alone is not sufficient to attract
investment. A skilled labour force, low corporate tax rate,
good infrastructure and political stability are also very
important.
Thesis Statement 2: An appreciation of SGD causes BOT

to fall leading to slower growth and higher
Anti-thesis Statement 2: It depends on the state of

the economy in fact strong SDG reduces both
12

unemployment
demand-pull and import-price push inflation
If BOT and FDI fall, it will mean a fall in AD NI by k

slow growth unemployment as production falls + rise in
inventories demand for labour retrenchment.
Reduce Demand-pull inflation

The severity depends on the current state of the
economy. If it is at full employment, then it may be
beneficial by cooling demand-pull inflation.
Illustrate with diagram:
GPL
From the above figure, we can see that a fall in BOT and
FDI leading to a fall in AD from AD 2 to AD3 leading to a
fall in GPL from P2 to P3, lowering the inflation.
AS
P2
P3
AD3
AD2
Help to reduce imported inflation

Spore is a resource poor country and depends heavily on
imported consumer goods thus a stronger dollar will
alleviate imported inflation.
P0
P1
AD1
AD0
Y1
Y0
YFE real NI
From the above figure, we can see that a fall in BOT leading
to a fall in AD from AD0 to AD1 leading to a fall in national
income from Y0 to Y1, thru the multiplier effect, lowering actual
growth.
As there is a fall in output, there will be a rise in inventory and
this may lead to some workers being retrenched and thus
raising the unemployment rate, thru an increase in cyclical
unemployment.
CONCLUSION
In theory an appreciation of a currency is likely to erode export competitiveness. Historically, in extreme cases it might
even threaten the survival of the entire export industry. However, in the context of Singapore, the policy of strengthening
the currency has not produced such adverse outcomes so far. On the contrary, based on empirical evidence, the policy of
pursuing a strong SGD has worked in Singapores favour. This is due primarily to the fact that most of Singapores
consumption and producer goods are imported and thus a strong currency help to keep domestic price stable and also
keep cost of imported inputs for our exporters low. In short, a gradual and modest appreciation policy, together with
supply-policies that make the demand for our exports price inelastic, have not damaged our balance of trade.
Thus a strong SGD has helped the economy achieved low inflation and sustained economic growth. By Tinbergen
principle, other policies need to be introduced for Singapore to reach the other goals.
13

Tut #20 - Exchange Rates (Answers) Deb - 21jan2014

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HWA CHONG INSTITUTION

Year Two H2 Economics 2013

TUTORIAL #20: EXCHANGE RATE SYSTEMS & POLICIES

Pls see answers at the end of lecture notes in tutors copy.

Section B: Data Handling Practice

Note to tutors: This is a typical trend reading question

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Appreciate at a falling rate between 2007 and 2010. (too time-consuming to

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price of Big Mac( Yuan)

Big Mac price in China (yuan)

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undervalued against the dollar. [2]

Additional note to students for understanding (NOT required for question)

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Question 2: SAJC 2012 Prelims

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(1) A fall in demand for pounds:

Suggested answer (with full case material)

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Question 3: ACJC 2012 Prelims

Table 3: Brazil-China Trade Balance (USD Millions)

Source: Brazilian Ministry of Development, Industry and Foreign Trade, 2012

With reference to Figure 2 and Table 3,

Note to tutors: 3 year period is too short for description of trend.

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Section C: Essay Practice

Use appropriate supply and demand analysis within

The most common error was to argue that contractionary

Simple Schematic Plan

INTRODUCTION (USE KIA)

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2. Rise in interest rates relative to

3. Anticipations of an exchange rate

A fall in Singapores inflation rate

If the interest rates in Brazil rise

When foreign exchange dealers,

UK residents will demand more of

This causes an increase in the

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the same time, Spore will import

demand for the Brazilian real

The demand for the currency (E.g.

Simple Schematic Plan

Antithesis Statement: An appreciation of SGD may

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(1) Current Account Worsen due to fall in BOT

(1) BOT may not be worsened

An appreciation of the exchange rate likely to result in

Often in the short-run, demand tends to be relatively

Assuming demand for exports is price elastic (justify):