Q. Explain how an increase in the real exchange rate affects exports and imports.

Answer: While the real exchange rate rises domestic products are cheaper relative to Foreign products. Because of this exports enhancing as foreigners demand more domestic exports. The revolutionize in imports is ambiguous for the reason that fewer units of imports are purchased the volume effect however each foreign unit is now more expensive the value effect. Keep in mind that exports and imports are measured in terms of domestic output that is dollar value not volume of units. Though we habitually assume that the volume effect outweighs the value effect thus that imports decrease when the real exchange rate rises.