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.
A decrease in income of a country leads to?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Leftward shift in the demand curve of foreign exchange.
When a country’s income decreases, people have less money to spend.
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As a result, spending on imported goods falls.
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This means the demand for foreign exchange (used to pay for imports) decreases.
Graphically, this causes a leftward shift in the demand curve for foreign exchange.