ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A key consequence of a foreign currency gap can be that a nation does not have enough foreign currency to pay for essential imports such as medicines, foodstuffs and critical raw materials and replacement component parts for machinery.

Detailed explanation-2: -1. In the goods market, a positive shock to the exchange rate of the domestic currency (an unexpected appreciation) will make exports more expensive and imports less expensive. As a result, the competition from foreign markets will decrease the demand for domestic products, decreasing domestic output and price. 2.

Detailed explanation-3: -A foreign currency gap exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments. In other words, the value of the current account deficit is larger than the value of capital inflows.

Detailed explanation-4: -An increase in the demand for a currency creates a rightward shift of the demand curve, ultimately causing a rise in the exchange rate and increasing the value of the currency demanded. Conversely, a fall in demand would shift the demand curve left and lead to a decline in the currency value.