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Question
What is 'appreciation' of domestic currency? What is its likely effect on exports and how?
Solution
Currency appreciation means the value of domestic currency becomes costlier in terms of foreign currency. For example, if the exchange rate for $1 = Rs 50 decreases to $1 = Rs 45, then the export of goods to foreign countries will become costlier. This implies that the rupee value is appreciated against the dollar. So, the goods worth Rs 48 for $1 only get exported, and hence, there is a decrease in the demand for exports.
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