If a country's currency appreciates, what is the most likely effect on its net exports?

• A. Net exports will increase because domestic goods become cheaper for foreign buyers.
• B. Net exports will increase because foreign goods become more expensive for domestic buyers.
• C. Net exports will remain unchanged because currency appreciation does not affect trade flows.
• D. Net exports will decrease because domestic goods become more expensive for foreign buyers.

Answer: (D)

Verified step by step guidance

1. Understand the concept of currency appreciation: when a country's currency appreciates, it means the currency's value increases relative to other currencies.
2. Recognize how currency appreciation affects prices: domestic goods become more expensive for foreign buyers because they need to spend more of their own currency to buy the appreciated currency.
3. Analyze the impact on exports: since domestic goods are more expensive for foreigners, the quantity of exports tends to decrease.
4. Analyze the impact on imports: foreign goods become relatively cheaper for domestic buyers, so imports tend to increase.
5. Combine these effects to understand net exports: net exports (exports minus imports) will likely decrease because exports fall and imports rise when the domestic currency appreciates.