Question

Other things remaining the same, when the foreign currency becomes cheaper, the effect on national income is likely to be : (Choose the correct alternative)

a. Positive
b. Negative
c. Positive and negative both
d. No effect

Answer 1

Negative

Currency appreciation takes place when there is a decrease in the price of a foreign currency in terms of the domestic currency. Here, less rupees are required to buy one dollar, i.e. the value of domestic currency becomes more valuable in relation to a foreign currency. So, the quantum of imports will increase and the exports will decrease, and thereby it leads to a decrease in national income.