Question : What is the impact of a stronger domestic currency on a country's imports and exports?

Option 1: Increase in imports, decrease in exports
  

Option 2: Decrease in imports, increase in exports
   

Option 3: Increase in imports, increase in exports

 

Option 4: Decrease in imports, decrease in exports

Correct Answer: Decrease in imports, increase in exports

Solution : The correct answer is b) Decrease in imports, increase in exports

A stronger domestic currency typically leads to a decrease in imports and an increase in exports. When a country's currency strengthens, it means that it can buy more foreign currency with its domestic currency. This increased purchasing power makes imports relatively more expensive, as the prices of imported goods and services are higher in terms of the stronger domestic currency.

As a result, the demand for imports tends to decrease. Consumers and businesses may opt for domestically produced goods and services or seek alternatives to imported products that have become relatively more expensive. This can lead to a decrease in the volume of imports.

On the other hand, a stronger domestic currency can make exports relatively cheaper for foreign buyers. The prices of exported goods and services, when expressed in foreign currencies, decrease. This increased competitiveness can boost the demand for exports, leading to an increase in export volumes.

The overall impact of a stronger domestic currency on a country's trade balance depends on various factors, such as the elasticity of demand for imports and exports, the structure of the economy, the responsiveness of domestic producers to export opportunities, and other global economic conditions.