ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the dollar depreciates (the exchange rate falls), the relative price of domestic goods and services falls while the relative price of foreign goods and services increases. 1. The change in relative prices will increase U.S. exports and decrease its imports.

Detailed explanation-2: -In general, when a currency loses value, people’s purchasing power declines as well because products-especially imported ones-cost more money. And when that causes a general rise in prices, it’s called inflation.

Detailed explanation-3: -Devaluing Currency A weak domestic currency makes a nation’s exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.

Detailed explanation-4: -For the trade deficit to turn into a surplus, imports must fall and exports must rise. One way this adjustment can take place is if the dollar depreciates, making imports more expensive for Americans and exports cheaper for foreigners.