a. It is said that the real exchange rate represents the relative price of imports versus exports for the average consumer in the US. Why?

b. Why is the real rate of exchange crucial for understanding the impact of a currency devaluation (under fixed exchange rates) or depreciation (under floating exchange rates) for analyzing the impact of the such devaluation or depreciation in determining the current account (or trade) balance? In your answer distinguish the effect of a higher R on exports vs. imports. Which of these effects can be predicted unambiguously?

c. If the price elasticity of demand for imports with respect to the real exchange rate is greater than 1, how would a devaluation of depreciation of the real exchange rate affect 6 the US consumers' total spending on imports and the total revenue the US producers will obtain on exported goods?

d. If the price elasticity of demand for import spending is less than 1, say .8 but the price elasticity of exports is 1, can you predict the impact of a rise in R (due to currency depreciation) on the US' current account balance (CA)?