CBSE 2025, Compartment, Set 1

Question

Explain the effect of appreciation of domestic currency on imports of a nation. Provide an example to support your explanation.

Edvaya · Accepted Answer

The correct answer is Subjective. Appreciation of the domestic currency implies a rise in the value of the domestic currency in relation to a foreign currency. **Effect on Imports:** When the domestic currency appreciates, foreign goods become relatively cheaper for domestic buyers because fewer units of the domestic currency are now required to buy the same amount of foreign goods. Consequently, this encourages domestic consumers to buy more from abroad, generally leading to a **rise in imports**. **Example:** Suppose the initial exchange rate is $1 = ₹90. If the domestic currency (Rupee) appreciates, the new exchange rate might drop to $1 = ₹80. Now, an Indian importer needs to pay only ₹80 (instead of ₹90) to purchase goods worth one US dollar from the USA. This makes American goods cheaper in India, boosting imports.

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Economics > Introductory Macroeconomics > Foreign Exchange Rate

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