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.

If the volume of imports of a country are growing faster than its volume of exports, its gross domestic product _____.

Will Fall.

The correct answer is Option (1) → Will Fall.

When a country's imports grow faster than its exports, it means that:

• More money is flowing out to pay for foreign goods,

• While less money is coming in from exports.

This leads to a trade deficit, which reduces net exports (X − M) — an important component of Gross Domestic Product (GDP) in the formula: GDP=C+I+G+(X−M)

As (X − M) becomes negative or smaller, the overall GDP falls.

Hence, if imports rise faster than exports, the gross domestic product will fall.

Note: This is NTA answer. Here the assumption is "other things - consumption, investment, and government expenditure- remaining unaffected"