What will happen to the National income when in a country the market value of its currency appreciates, other things remaining constant?
Answer & explanation
Correct answer: option 2
The correct answer is option 2:fall
When the market value of a country's currency appreciates, other things remaining constant, the following effects can occur on the national income:
- Exports become more expensive for foreign buyers, which can lead to a decrease in export demand.
- Imports become cheaper for domestic consumers, which can lead to an increase in import demand.
- A decrease in exports and an increase in imports can result in a reduction in net exports, which is a component of national income (GDP).
Given these points, the likely effect of an appreciation in the currency, other things being equal, is a decrease in national income because the reduction in net exports would reduce overall economic activity.