Read the passage carefully and answer the questions based on the passage:

Income and the Exchange Rate

When income of a country 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.

Other things remaining same, If the income abroad increases, what is the likely effect of the same on national income of the domestic economy?

National income is likely to rise.

The correct answer is Option (2) → National income is likely to rise.

When income abroad increases, people in foreign countries have more purchasing power.

• They will buy more goods and services, including imports from the domestic country.

• This means domestic exports increase, leading to higher production, income, and employment within the domestic economy.

Therefore, an increase in foreign income leads to a rise in the national income of the domestic economy.