Currency Appreciation and Import Costs

Steps:

• Increasing the foreign exchange rate appreciates the domestic currency.
• Appreciation raises export prices abroad but lowers import prices domestically.
• When import + export demand elasticities sum >1 (Marshall-Lerner condition), appreciation worsens the trade balance long-term.
• Governments may still appreciate to cut costs for import-dependent industries.

Why D is correct:

• Currency appreciation reduces the domestic cost of foreign goods via the exchange rate mechanism, making imported raw materials cheaper for producers.

Why the others are wrong:

• A: Appreciation increases costs for foreign tourists, reducing inflows.
• B: Cheaper imports exert downward pressure on prices, curbing inflation.
• C: Marshall-Lerner condition (>1 sum) implies appreciation deteriorates the current account.

Final answer: D