Question

DEP Inc. is interested in forecasting the trends in the real exchange rate of Vietnamese currency, dong, because its supply chain depends heavily on Vietnamese producers. The company's management assesses the components of aggregate demand in Vietnam and determines that in the past, total private and public expenditure on nontradables has been growing at the same rate as the supply of nontradables in Vietnam, as has been the case in all other countries. However, DEP's management notices that the situation in Vietnam has started to change and concludes that in the foreseeable future, the demand for nontradables in Vietnam will be growing slower than the supply of nontradables, while the situation in the rest of the world will not change. Assume that other factors remain unchanged. Based on this assessment, DEP Inc. can conclude that over the next several years, the dong's real exchange rate will be
a. depreciating vis-à-vis all other currencies.
b. appreciating vis-à-vis all other currencies.
c. remaining unchanged vis-à-vis all other currencies.
d. depreciating vis-à-vis some currencies, while appreciating vis-à-vis some others.

Answer 1

Answer:

b. appreciating vis-à-vis all other currencies.

Explanation:

Since the demand for non tradables will be slow then the supply; its price in Vietnam will decline a decline in domestic prices relative to international prices will raise exports and hence improve the external balance of Vietnamese economy appreciating its exchange rate.