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(c) Suppose the central bank of Country M has been using its domestic currency to buy...

(c) Suppose the central bank of Country M has been using its domestic currency to buy foreign currencies, but has now stopped that policy. As a result, and all else equal, what happens to the exports and imports of Country M? Why?

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Answer #1

If the Central Bank of country M stops buying foreign currencies, then the value of the local currency of country M would appreciate in relation to those foreign currencies. If the value of the local currency of country M appreciates, then the residents of can afford more foreign goods now and therefore, imports will increase. But if the local currency of country M appreciates, then the exporters will receive lesser local currency for their exports and therefore, the exports will reduce.

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