What effect does appreciation of domestic currency have on foreign trade?
Answer & explanation
Correct answer: option 1
Appreciation of currency is the decrease in the exchange rate of 2 countries due to market forces of demand and supply. It encourages the imports of the country. Appreciation of domestic currency make imports cheaper for the domestic country residents, due to which the imports increases. Earlier we had to pay Rs70 for importing a product worth 1 dollar, now that will decrease to Rs50 due to appreciation of domestic currency.