ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.

Detailed explanation-2: -Key Takeaways A weaker domestic currency stimulates exports and makes imports more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor.

Detailed explanation-3: -On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market. Devaluation is a decision that makes a currency lose value.

Detailed explanation-4: -(ii) When foreign currency becomes cheaper (in relation to domestic currency) and its purchasing power reduces in the domestic market, foreigners are less inclined to make (Foreign Direct Investment). Accordingly, the supply of foreign currency reduces.