Other things remaining unchanged, when in a country the price of foreign currency rises, national income is:
Likely to fall
Incorrect AnswerLikely to rise
Correct AnswerLikely to rise and fall both
Incorrect AnswerNot affected
Incorrect AnswerExplanation:
Here’s how it shakes out:
- When the price of foreign currency goes up, that just means your own currency is weaker. In other words, it takes more of your money to buy a dollar or a euro.
- This makes imports more expensive for you. So, stuff coming from abroad costs more, which usually leads people to buy less from outside the country.
- At the same time, your exports get cheaper for foreigners. So, people elsewhere might buy more of what your country makes.
- But—and this is key—higher prices for imports can cause costs to rise at home, especially for things you need to import (like oil, machinery). That cost increase can slow down the economy.
- All in all, in the short run, national income is more likely to dip, not rise, because higher import prices can hurt both consumers and producers.
So, the right pick is:
- Likely to fall
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