Question

How could a country purposefully appreciate its currency? Why might it choose to do this?

Answer 1

Currency appreciation is the increase in the value of a country's currency. It implies that the currency becomes worth more than other countries. When a currency is appreciated, the price of the country's exports will increase while the price of the country's imports will decrease. For instance, if the US dollar appreciates relative to the pound, the exchange rate falls which means that it takes few US Dollars to purchase 1 British pound. Hence, when the US dollar appreciates relative to the pound, it would lead to larger import of British goods and services and lower exports of US goods and services.

Currency appreciation happens due to many factors. When one country is more productive than the other country, the demand for that country's goods and services would increase. This would result in less imports and more of exports. Therefore, in the long run, an increase in a country's exports would cause its currency to appreciate. Similarly, trade barriers like quotes and tariffs cause the currency to appreciate for the country that imposed it. In addition to this, when a currency is appreciated, it could reduce the cost of investment for domestic businesses. This is because, when a country cannot produce certain goods, it needs to import them. Since appreciation cheapens imports, it will increase the benefit of importing high technology goods that are not available in the domestic country.