Imposing an import quota causes the domestic real exchange rate to
A)appreciate,which increases foreign demand for domestic goods.
B)appreciate,which decreases foreign demand for domestic goods.
C)depreciate,which increases foreign demand for domestic goods.
D)depreciate,which decreases foreign demand for domestic goods.

Question

Quizplus · Accepted Answer

An import quota reduces the supply of foreign goods, leading to a decrease in the supply of foreign currency. This causes the domestic currency to appreciate, making domestic goods more expensive for foreigners, thus decreasing foreign demand for domestic goods.

Imposing an Import Quota Causes the Domestic Real Exchange Rate