A country whose currency is depreciating in real terms relative to other currencies is likely to experience a decrease in: Exports Inflation a. Yes Yes b. Yes No c. No Yes d. No No
I d say D
Here’s the answer, but I’m stuck on the last sentence, which would have implied answer C. Choice “d” is correct. If a currency depreciates relative to another currency, it would make its exports cheaper and make imports more expensive. Over time, this should increase the country’s exports and decrease imports. Increased demand for goods would tend to increase inflation. Increased inflation would cause currency depreciation. Thus, a country with a depreciating currency is likely to experience an increase in its rate of inflation.
the question asks: a DECREASE in 1) Export 2) Inflation. which means NO and NO in both case. Choice D.
In the explanation above it say, increased demand, increases inflation and hence further depreciates the currency. What if i say " increased demand, increases deamnd for local currency and hence and hence the currency appreciates… and then the whole course would change" My question is that there are so many ways a particular thing could take. How do you think it right always??