Which of the following statements is true, if other things remaining the same , the exchange rate changes from 1\($\) = ₹80 to 1\($\) = ₹75
(A) Import will fall
(B) Imports will rise
(C) Exports will rise
(D) National income will rise
(E) National income will fall
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : (B) and (E) only
Explanation :
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Imports will fall (Option A): When the domestic currency appreciates (₹ strengthens), imports become cheaper in terms of domestic currency. This tends to reduce the cost of imported goods and thus imports may increase rather than fall. Therefore, option A is not true.
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Imports will rise (Option B): This is correct. With a stronger rupee (₹75 per $ compared to ₹80 per $), imports become cheaper for domestic consumers. As a result, imports are likely to rise because foreign goods are now relatively less expensive.
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Exports will rise (Option C): An appreciation of the domestic currency usually makes exports more expensive for foreign buyers. This can lead to a decrease in exports rather than an increase. Therefore, option C is not true.
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National income will rise (Option D): Typically, an appreciation of the domestic currency (₹ in this case) can lead to a decrease in exports and an increase in imports, which may negatively impact overall economic activity and national income. Therefore, option D is not true.
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National income will fall (Option E): This is correct. A stronger rupee (appreciation) can lead to a decrease in exports and potentially an increase in imports, both of which can adversely affect economic growth and hence national income. (NX = Exports - Imports)