A sharp and sustained appreciation in the exchange rate of an open economy is likely to cause a rise in cyclical (demand-deficient) unemployment because
the domestic price of imported raw materials rises, leading to a contraction in short-run aggregate supply and structural unemployment.
domestic firms will immediately substitute domestic labor with cheaper foreign capital, causing a rise in frictional unemployment.
foreign consumers face higher foreign-currency prices for domestic exports, causing a contraction in net exports and aggregate demand.
the central bank will be forced to raise domestic interest rates to prevent capital flight, causing investment to fall.
