Question : Keeping other factors constant, when the price of foreign currency rises, national income is:
Option 1: Might fall
Option 2: Might increase
Option 3: Both a and b
Option 4: Not affected
Correct Answer:
Might increase
Solution : The correct answer is (b) Might increase.
When the price of foreign currency rises, it means that the domestic currency depreciates or loses value relative to the foreign currency. This can have several effects on the national income of a country. On one hand, it can make domestic goods relatively cheaper for foreign buyers, potentially increasing exports and boosting national income. On the other hand, it can make imported goods relatively more expensive, potentially reducing imports and stimulating domestic production, which can also contribute to an increase in national income. However, the overall impact on national income will depend on various factors, including the structure of the economy, the elasticity of demand for exports and imports, and other macroeconomic conditions. Therefore, the correct answer is that national income "might increase" when the price of foreign currency rises, as it depends on the specific circumstances and dynamics of the economy.
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