The value of the Russian Ruble changed from 94 to the dollar to 91 to the dollar. What is the likely effect of this change in the foreign exchange market? A. It will make Russia's imports cheaper but may harm its export competitiveness. B. It will boost Russia's exports, making them more competitive. C. It will have no impact on trade, as exchange rates do not influence international commerce. D. It will encourage capital outflows and discourage foreign investment.
Question
The value of the Russian Ruble changed from 94 to the dollar to 91 to the dollar. What is the likely effect of this change in the foreign exchange market? A. It will make Russia's imports cheaper but may harm its export competitiveness. B. It will boost Russia's exports, making them more competitive. C. It will have no impact on trade, as exchange rates do not influence international commerce. D. It will encourage capital outflows and discourage foreign investment.
Solution
The correct answer is B. It will boost Russia's exports, making them more competitive.
Here's why:
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The foreign exchange rate is the rate at which one currency can be exchanged for another. In this case, it's the number of Russian Rubles that can be exchanged for one US dollar.
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If the value of the Ruble changes from 94 to the dollar to 91 to the dollar, it means that the Ruble has appreciated or strengthened against the dollar. This is because you now need fewer Rubles to get one dollar.
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When a country's currency appreciates, its exports become more expensive for foreign buyers. This is because foreign buyers now need more of their own currency to buy the same amount of goods. This could potentially make Russia's exports less competitive.
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However, an appreciation of the Ruble also means that imports become cheaper. This is because Russians now need fewer Rubles to buy foreign goods. This could potentially boost Russia's imports.
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Therefore, the likely effect of this change in the foreign exchange market is that it will boost Russia's exports, making them more competitive, but it may also make Russia's imports cheaper.
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