Question : A decrease in the real exchange rate implies:
Option 1: Increased competitiveness of domestic goods in the international market.
Option 2: Reduced competitiveness of domestic goods in the international market.
Option 3: Increased inflation in the domestic economy.
Option 4: Reduced inflation in the domestic economy.
Correct Answer:
Increased competitiveness of domestic goods in the international market.
Solution : The correct answer is (a) Increased competitiveness of domestic goods in the international market.
A decrease in the real exchange rate means that the relative price of domestic goods and services has decreased compared to foreign goods and services. This makes domestic goods relatively cheaper for international consumers, increasing their competitiveness in the international market. As a result, the demand for domestic goods may increase, leading to higher exports and potentially boosting the domestic economy.
Conversely, an increase in the real exchange rate would imply reduced competitiveness of domestic goods in the international market, as they would become relatively more expensive compared to foreign goods.
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