Barriers to imports strengthen domestic currency

Steps:

• In a floating exchange rate, currency appreciates when demand for it rises or supply falls in the forex market.
• Appreciation occurs via reduced imports (less domestic currency supplied for foreign goods) or increased exports/ capital inflows (more foreign demand for domestic currency).
• Evaluate options: A affects export competitiveness; B restricts import purchases; C reduces export demand; D lowers capital attraction.
• Identify the option that decreases supply of domestic currency without increasing it elsewhere.

Why B is correct:

• Administrative burdens raise import costs, reducing import volume and thus supply of domestic currency for foreign exchange (per balance of payments, imports create currency supply).

Why the others are wrong:

• A: Competitor's currency depreciation boosts their exports, harming this country's export demand and causing depreciation.
• C: Falling exports reduce foreign demand for domestic currency, leading to depreciation.
• D: Lower interest rates deter capital inflows, decreasing demand for domestic currency and causing depreciation.

Final answer: B