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Question
Other things remaining the same, when the foreign currency becomes cheaper, the effect on national income is likely to be : (Choose the correct alternative)
a. Positive
b. Negative
c. Positive and negative both
d. No effect
Solution
Negative
Currency appreciation takes place when there is a decrease in the price of a foreign currency in terms of the domestic currency. Here, less rupees are required to buy one dollar, i.e. the value of domestic currency becomes more valuable in relation to a foreign currency. So, the quantum of imports will increase and the exports will decrease, and thereby it leads to a decrease in national income.
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