How does an overvalued dollar affect U.S. exports and imports?
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How does an overvalued dollar affect U.S. exports and imports? |
Explanation
When a currency's value in terms of any other currency is more than its equilibrium rate, it is said to be overvalued.
When a country's currency is overvalued, people overseas will find it expensive to buy the country's goods. It is because an overvalued currency will increase their price, thereby decreasing the quantity demanded.
On the other hand, foreign goods for the country's citizens will be cheaper as they could convert more units of foreign currency for a unit of home currency. Consequently, they will demand more foreign goods, thereby increasing imports.
Verified Answer
An overvalued dollar will lead to an increase in the price of Country U's products for foreigners leading to a decrease in Country U's exports and an increase in the country's imports.
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