Question

Higher national income increases imports and produces which result?

Options

• Official decrease in exchange rate and revaluation

• Demand for foreign exchange rises and domestic currency depreciates

• Demand for domestic currency rises and domestic currency appreciates

• RBI buys foreign exchange because the fixed rate is above equilibrium

Answer 1

Higher national income increases imports, which raises demand for foreign exchange. The higher demand for foreign exchange causes domestic currency to depreciate.