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?