Question : Assertion: Appreciation of a country's currency can lead to a decrease in its inflation rate.
Reason: A stronger currency reduces the cost of imported goods, thereby lowering inflationary pressures.
Option 1: True, as imported goods become relatively cheaper, reducing inflationary pressures.
Option 2: True, only if the country has a high dependence on imported goods.
Option 3: False, as currency appreciation has no impact on a country's inflation rate.
Option 4: False, as currency appreciation leads to higher inflation due to increased purchasing power.
Correct Answer:
True, as imported goods become relatively cheaper, reducing inflationary pressures.
Solution : The answer is (a) True, as imported goods become relatively cheaper, reducing inflationary pressures.
Appreciation of a country's currency can indeed lead to a decrease in its inflation rate. When a country's currency appreciates, the cost of imported goods becomes relatively cheaper. This can lead to a decrease in the prices of imported goods, which in turn reduces inflationary pressures. If a country has a high dependence on imported goods, the impact of currency appreciation on lowering inflation can be more significant. Therefore, a stronger currency can contribute to a decrease in the country's inflation rate.
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