Which of the following statements are correct?
(A) When income in a country increases, its spending on imported goods is likely to increase.
(B) A rise in imports shifts the demand curve for foreign exchange to the left.
(C) If income abroad increases, domestic exports rise and the supply curve of foreign exchange shifts outward.
(D) If income rises both at home and abroad, the domestic currency depreciates when exports grow faster than imports.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (C) only
Income at home drives imports, and so the demand for foreign exchange. Income abroad drives our exports, and so the supply of foreign exchange.
(A) When income in a country increases, its spending on imported goods is likely to increase. — Correct. People spend more, imports included.
(B) A rise in imports shifts the demand curve for foreign exchange to the left. — Incorrect. More imports need more foreign exchange, so demand shifts to the right.
(C) If income abroad increases, domestic exports rise and the supply curve of foreign exchange shifts outward. — Correct. Foreigners buy more of our goods and pay in their currency.
(D) If income rises both at home and abroad, the domestic currency depreciates when exports grow faster than imports. — Incorrect. If exports grow faster, supply of foreign exchange grows faster than demand, so the currency does not depreciate. It depreciates when imports grow faster.
NCERT (2026-27): “Income and the Exchange Rate When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.” |