Question : What is the impact of a stronger domestic currency on a country's imports and exports?
Option 1: Increase in imports, decrease in exports
Option 2: Decrease in imports, increase in exports
Option 3: Increase in imports, increase in exports
Option 4: Decrease in imports, decrease in exports
Correct Answer: Decrease in imports, increase in exports
Solution : The correct answer is b) Decrease in imports, increase in exports
A stronger domestic currency typically leads to a decrease in imports and an increase in exports. When a country's currency strengthens, it means that it can buy more foreign currency with its domestic currency. This increased purchasing power makes imports relatively more expensive, as the prices of imported goods and services are higher in terms of the stronger domestic currency.
As a result, the demand for imports tends to decrease. Consumers and businesses may opt for domestically produced goods and services or seek alternatives to imported products that have become relatively more expensive. This can lead to a decrease in the volume of imports.
On the other hand, a stronger domestic currency can make exports relatively cheaper for foreign buyers. The prices of exported goods and services, when expressed in foreign currencies, decrease. This increased competitiveness can boost the demand for exports, leading to an increase in export volumes.
The overall impact of a stronger domestic currency on a country's trade balance depends on various factors, such as the elasticity of demand for imports and exports, the structure of the economy, the responsiveness of domestic producers to export opportunities, and other global economic conditions.
Question : Currency appreciation can negatively impact a country's ________, as it makes the country's exports more expensive.
Option 1: trade balance
Option 2: foreign investment
Option 3: inflation rate
Option 4: unemployment rate
Question : When price of a foreign currency falls ______from that foreign country becomes cheaper and ________ increases.
Option 1: Imports, imports
Option 2: Exports, exports
Option 3: Imports, exports
Option 4: Exports, Imports
Question : A decrease in a country's exports is likely to result in:
Option 1: Appreciation of its currency
Option 2: Depreciation of its currency
Option 3: No impact on its currency
Option 4: A fixed exchange rate
Question : Assertion: Fluctuations in foreign exchange rates impact a country's imports and exports.
Reason: Changes in exchange rates affect the relative prices of goods and services, making imports more expensive and exports more competitive.
Option 1: True for a country with fixed exchange rates.
Option 2: True only for countries with a large trade deficit.
Option 3: True, as exchange rate fluctuations impact the competitiveness of a country's goods and services in the global market.
Option 4: False, as foreign exchange rates have no influence on a country's imports and exports.
Question : Which of the following best describes appreciation of currency:
Option 1: Imports become costlier
Option 2: Exports become cheaper
Option 3: Imports become cheaper
Option 4: No effect on Exports
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