Principles of Economics- Mankiw (5th) 661

Principles of Economics- Mankiw (5th) 661 - CHAPTER 30 A...

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CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 683 government bond, it needs to change dollars into yen, so it supplies dollars in the market for foreign-currency exchange. Net exports represent the quantity of dol- lars demanded for the purpose of buying U.S. net exports of goods and services. For example, when a Japanese airline wants to buy a plane made by Boeing, it needs to change its yen into dollars, so it demands dollars in the market for foreign-currency exchange. What price balances the supply and demand in the market for foreign- currency exchange? The answer is the real exchange rate. As we saw in the pre- ceding chapter, the real exchange rate is the relative price of domestic and foreign goods and, therefore, is a key determinant of net exports. When the U.S. real ex- change rate appreciates, U.S. goods become more expensive relative to foreign goods, making U.S. goods less attractive to consumers both at home and abroad. As a result, exports from the United States fall, and imports into the United States
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