When the income of domestic consumers increases, their spending will increase and thus spending on imported goods is also likely to increase. This leads to .................. of domestic currency?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Depreciation
When domestic consumers’ income increases, they tend to spend more, including on imported goods.
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This increases the demand for foreign currency (to pay for imports).
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As a result, the supply of domestic currency in the foreign exchange market rises.
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This causes the value of the domestic currency to fall relative to foreign currencies.
This fall in the value of domestic currency due to market forces of demand and supply is called Depreciation.