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I'm struggling with this question below for my macroeconomics course.

If Argentina were to impose a tariff on its imports, how will the supply of Argentina's currency and its exchange rate be affected in foreign exchange markets?

Answer: Supply - Decrease. Currency - Appreciate.

I think I understand, but need someone to say "no" or "yes, but..." to my rationale.

If Argentina imposes a protective tariff, that's to encourage Argentinian domestic industry and exports and discourage imports into Argentina. I know that if a country exports more than it imports (a "favorable" balance of trade), there is a greater demand for its goods - and thus, a greater demand for its currency - on the Foreign Exchange Market. With that said, when demand for Argentinian currency increases, the price level increases, and the Argentinian currency appreciates.

I think I can also explain why supply decreases...is it because demand increases? But, we don't typically say "Oh, since demand increases, I'm also going to decrease supply", though. Can somebody explain, please?

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  • $\begingroup$ That is a little weird. Have you discussed in class central bank responses to forex movements, e.g. sterilization? It's not clear if the question intends to be "ceteris paribus" with respect to what the Argentine central bank might do. $\endgroup$ – Fizz May 12 '19 at 14:13
  • $\begingroup$ Nearly identical question asked here: economics.stackexchange.com/questions/15082/… $\endgroup$ – Clinical_Coder May 13 '19 at 13:54

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