Which of the following statements is true. If exchange rate changes from $1 = ₹72 to ₹81.
A. Import will fall
B. Import will rise
C. Exports will rise
D. National Income will rise
E. National Income will fall
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is A, C and D only.
When the exchange rate changes from $1 = ₹72 to ₹81, this means that the Indian rupee has depreciated against the US dollar. This means that it takes more rupees to buy one dollar. As a result, imports will become more expensive, and exports will become cheaper.
Explanation:
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A. Import will fall: When the domestic currency depreciates (as indicated by the increase in the exchange rate from $1 = ₹72 to ₹81), imports become more expensive, potentially leading to a decrease in imports.
- C. Exports will rise: A depreciation in the domestic currency can make exports cheaper for foreign buyers, potentially leading to an increase in exports.
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D. National income: When exports increase, it means that India is earning more foreign exchange. This foreign exchange can then be used to buy imports, invest in new businesses, or repay foreign debt. As a result, national income is likely to rise.