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Questions and Answers
What happens to exports when domestic currency depreciates?
What happens to exports when domestic currency depreciates?
- Exports decrease as foreign goods become cheaper.
- Exports decrease because domestic goods become more expensive.
- Exports remain unchanged regardless of currency value.
- Exports increase as domestic goods become cheaper. (correct)
How does currency depreciation affect imports?
How does currency depreciation affect imports?
- Imports decrease as foreign goods become more expensive. (correct)
- Imports increase because foreign goods are cheaper.
- Imports become less valuable due to depreciation.
- Imports remain the same since currency value is irrelevant.
What is a primary effect of depreciation on national income?
What is a primary effect of depreciation on national income?
- National income can only increase with currency appreciation.
- National income increases due to a rise in net exports. (correct)
- National income remains static as exports do not affect it.
- National income decreases due to higher import costs.
What does it mean when it is stated that the domestic currency has depreciated?
What does it mean when it is stated that the domestic currency has depreciated?
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Which statement aligns with the concept of currency depreciation?
Which statement aligns with the concept of currency depreciation?
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Which scenario illustrates currency depreciation?
Which scenario illustrates currency depreciation?
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What is the relationship between currency depreciation and national income?
What is the relationship between currency depreciation and national income?
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Which of the following statements is true about currency depreciation?
Which of the following statements is true about currency depreciation?
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Study Notes
Currency Depreciation
- Currency Depreciation is the decrease in the value of a domestic currency relative to foreign currencies, requiring more domestic currency to purchase foreign currency.
- Example: If the price of $1 increases from 81 to 82 rupees, the rupee is considered to be depreciating. Similarly, a change from £5 = 64 to £4.5 = 64 indicates depreciation of the UK pound.
Effects of Currency Depreciation
- Increase in Exports: As the domestic currency depreciates, goods become cheaper for foreign buyers, leading to higher export volumes.
- Decrease in Imports: Domestic currency depreciation makes foreign goods more expensive, resulting in reduced imports due to increased cost in domestic currency.
- Increase in National Income: The combination of rising exports and falling imports increases net exports, contributing to a higher national income, assuming other factors remain constant.
Clarifications on Economic Terms
- Several phrases communicate the same concept regarding currency depreciation, notably indicating a decrease in domestic currency value.
- Examples of synonymous statements include:
- The domestic currency has depreciated.
- There is a fall in the price of domestic currency.
- Emphasis on understanding that depreciation causes an increase in exports and a decrease in imports, thereby raising national income.
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