ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In the event of depreciation of the country’s currency, its exports tend to increase while imports tend to decrease.

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: -When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper.

Detailed explanation-4: -The effect on current-dollar imports is more ambiguous: Depreciation increases the dollar cost of a given volume of imports, but the volume may decline to the extent that domestic goods and services are substituted for imports in response to the increase in the relative cost of purchases from abroad.

Detailed explanation-5: -However, the indirect effects of an exchange rate depreciation increase the volume of exports and reduce the volume of imports. This will tend to increase net exports and diminish the current account deficit.