ECONOMICS
BALANCE OF TRADE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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demand for the other currency will decrease resulting in depreciation
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supply of the other currency will decrease resulting in appreciation
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supply of the other currency will increase resulting in appreciation
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supply of the other currency will increase resulting in depreciation
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Detailed explanation-1: -The economics of supply and demand dictate that when demand is high, prices rise and the currency appreciates in value. In contrast, if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline.
Detailed explanation-2: -At the equilibrium exchange rate, the supply and demand for a currency are equal. Shifts in the supply or demand for a currency lead to changes in the exchange rate. Because one currency is exchanged for another in a foreign exchange market, the demand for one currency entails the supply of another.
Detailed explanation-3: -Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.
Detailed explanation-4: -Thus, depreciation of a currency tends to increase a country’s balance of trade (exports minus imports) by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive.