What effect does depreciation of domestic currency have on foreign trade?
Answer & explanation
Correct answer: option 2
The correct answer is Option 3: It encourages export of the domestic country
- Depreciation of domestic currency means that the value of the domestic currency falls relative to foreign currencies.
- As a result:
- Exports become cheaper for foreign buyers because they need to spend less of their currency to buy domestic goods.
- Imports become more expensive for domestic consumers because they need to spend more domestic currency to buy foreign goods.
- This leads to an increase in exports and a decrease in imports, benefiting domestic producers who sell goods abroad.