Question : A decrease in a country's exports is likely to result in:
Option 1: Appreciation of its currency
Option 2: Depreciation of its currency
Option 3: No impact on its currency
Option 4: A fixed exchange rate
Correct Answer:
Depreciation of its currency
Solution : The correct answer is b) Depreciation of its currency
A decrease in a country's exports is likely to result in the depreciation of its currency. When a country's exports decline, there is reduced demand for its currency in the foreign exchange market. This decrease in demand can lead to a depreciation of the currency's value relative to other currencies.
A decrease in exports can indicate a weaker economic performance or competitiveness, which can affect investor confidence and reduce the attractiveness of the country's currency. As a result, market participants may sell the currency, leading to its depreciation.
It's important to note that exchange rates are influenced by a variety of factors, and the relationship between exports and currency value is not the only determinant. Other economic factors, market sentiment, monetary policy, and global economic conditions can also influence exchange rates.
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