How can currency depreciation stimulate an increase in net exports ? 1. By reducing export costs 2. By reducing import prices Select the answer using the code given below :
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Correct answer
Explanation
The correct answer is A, 1 only. When a currency depreciates, a country's goods become cheaper for foreign buyers, while imports become dearer at home, not cheaper. Suppose the rupee falls from 80 to 90 per dollar. A product priced at 900 rupees now costs a foreign buyer 10 dollars instead of 11.25, so exporters can sell more at the same rupee price, which in effect lowers the cost of Indian exports abroad. At the same time, a 10-dollar import now costs 900 rupees instead of 800, so people buy fewer imported goods. More exports and fewer imports together raise net exports, which is exports minus imports. This is why a weaker currency is said to help the trade balance, although costlier imported inputs such as crude oil can push up inflation. Option B is wrong because depreciation raises import prices. Option C is wrong because statement 2 is false. Option D is wrong because statement 1 is correct. Exam tip: depreciation makes exports cheaper and imports dearer.
Practice Questions
View allWhich one of the following central features is not associated with Capitalist Economy?
- A.There is generalised commodity production - it has market value.
- B.Productive wealth is held predominantly in private hands.
- C.Economic life is organised according to market principles.
- D.Economic organisation is based on planning, a supposedly rational process of resource allocation.
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Allocation of resources through central planning is the mark of a socialist or command economy, not a capitalist one. In a capitalist economy, the means of production such as land, factories and capital are owned mainly by private individuals and firms.
Read the full explanation →Consider the following statements:
I. The Second Five-Year Plan sought to promote development which would establish socialistic pattern of society in India.
II. Between 1966 and 1969, three Annual Plans were formulated.
III. The Ninth Five-Year Plan could not take off at its stipulated time in the 60th year of India's Independence.
Which of the statements given above are correct?
- A.I and II only
- B.I and III only
- C.II and III only
- D.I, II and III
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Statements I and II are true, but the Ninth Plan began in 1997, the fiftieth year of Independence, not the sixtieth.
Read the full explanation →According to the National Multi-dimensional Poverty Index (MPI) constructed by the NITI Aayog, a household is considered deprived if 1. a single member of the household is identified as under-nourished 2. the body mass index of a woman member, between 15 years and 49 years of age, is below 18.5 kg/m2 Select the correct answer using the code given below.
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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Under the nutrition indicator, a household is deprived if any one eligible member is undernourished, and a woman of 15 to 49 with a BMI below 18.5 counts as undernourished.
Read the full explanation →Which one of the following canons of taxation was not advocated by Adam Smith?
- A.Canon of equality
- B.Canon of certainty
- C.Canon of convenience
- D.Canon of fiscal adequacy
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Adam Smith laid down four canons of taxation, and fiscal adequacy was not one of them; it was added by later economists.
Read the full explanation →Which one of the following is a good statistic to evaluate where an economy stands in the financial cycle ?
- A.Tax/GDP Ratio
- B.Fiscal Deficit/GDP Ratio
- C.Household Consumption/GDP Ratio
- D.Credit/GDP Ratio
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The financial cycle is the rise and fall of credit and asset prices, and the ratio of credit to GDP shows how far borrowing has run ahead of the economy.
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