ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Appreciation of domestic currency means lower price of foreign currency in terms of domestic currency. This increases the price of domestic goods for foreign buyers. This means imports become cheaper. As a result the demand for imports may rise.

Detailed explanation-2: -When a country’s currency appreciates in relation to foreign currencies, foreign goods become cheaper in the domestic market and there is overall downward pressure on domestic prices. In contrast, the prices of domestic goods paid by foreigners go up, which tends to decrease foreign demand for domestic products.

Detailed explanation-3: -Appreciation of domestic currency occurs when market determined exchange rate falls.It signifies that foreign buyers will be able to buy less from one unit of currency. This makes exports costlier for the foreign buyers. As a result exports are likely to decline.

Detailed explanation-4: -Effects of Currency Appreciation Export costs rise: If the U.S. dollar appreciates, foreigners will find American goods more expensive because they have to spend more for those goods in USD. That means that with the higher price, the number of U.S. goods being exported will likely drop.

Detailed explanation-5: -An appreciation tends to cause lower inflation because: import prices are cheaper. The cost of imported goods and raw materials will fall after an appreciation, e.g. imported oil will decrease, leading to cheaper petrol prices.