An appreciation or revaluation – a rise in the exchange rate

will make exports more expensive in terms of foreign currencies

will make imports cheaper in terms of the domestic currency.

Lower aggregate demand

A rise in the exchange rate is likely to result in a fall in demand for domestic products. Lower aggregate demand may result in a rise in unemployment and a slowdown in economic growth.

Reduced inflationary pressure

A higher exchange rate may reduce inflationary pressure by shifting the aggregate supply curve to the right because of lower costs of imported raw materials.

Increased competitive pressure

The price of imported finished products would also fall and there would be increased competitive pressure on domestic firms to restrict price rises in order to try to maintain their sales at home and abroad.



A higher exchange rate may increase a current account deficit or reduce a current account surplus but the outcome will depend mainly on the price elasticities of demand for exports and imports.

The Marshall-Lerner condition and the J-curve work in reverse.

So a current account surplus will only be reduced if the sum of the price elasticities of demand for exports and imports is greater than 1. A rise in the exchange rate may increase a current account surplus in the short run before reducing it in the longer run.