Maxistan and Theopolis are trading partners. The currency of Maxistan is the peso and the currency of Theopolis is the card.

What happens to the value of each currency if Maxistan places a tariff on exports from Theopolis?

Choose 1 answer:
(A) The card depreciates and the peso appreciates.
(B) Both currencies depreciate.
(C) The card is unaffected and the peso appreciates
(D) Both currencies appreciate.
(E) The card depreciates and the peso is unaffected.

Question

Maxistan and Theopolis are trading partners. The currency of Maxistan is the peso and the currency of Theopolis is the card.

What happens to the value of each currency if Maxistan places a tariff on exports from Theopolis?

Choose 1 answer:
(A) The card depreciates and the peso appreciates.
(B) Both currencies depreciate.
(C) The card is unaffected and the peso appreciates
(D) Both currencies appreciate.
(E) The card depreciates and the peso is unaffected.

Accepted Answer

***A*** ∻Key Concept∻ ⚹Tariff Impact on Currency Values⚹ ∻Explanation∻ ⚹When Maxistan imposes a tariff on exports from Theopolis, it makes Theopolis's goods more expensive in Maxistan, reducing the demand for Theopolis's currency (the card) to pay for those goods. This can lead to a depreciation of the card. Conversely, as Maxistan's goods become relatively cheaper, the demand for the peso may increase, leading to an appreciation of the peso.⚹◊How would the imposition of a tariff by Maxistan on exports from Theopolis impact the terms of trade between the two countries?⍭ Generate me a similar question◊

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