An overvalued currency is one that is expected to decline in value relative to other currencies. What is the effect on your firm which produces in the country whose currency is overvalued and sells to other nations? Suppose you are managing a firm that produces in each of the countries listed below and sells according to the description. How would you protect the firm from exchange rate changes? How would you expect downturns in the United States to affect your business?
(a) A small country that conducts all of its trade with the United States.
(b) A country that has no international trade.
(c) A country whose policies have led to a 300 percent annual rate of inflation.
(d) A country that wants to offer exporters cheap access to the imported inputs they need but to discourage other domestic residents from importing goods.