Appreciation of domestic currency makes imports:
Options
ACheaper
BCostlier
CSame
DZero
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International TradePYQ - Dec 2021 (Inter)Question 177 of 20
All Questions Correct Answer
✅ Option a — Cheaper
All Options:
- ACheaper
- BCostlier
- CSame
- DZero
Detailed Solution & Explanation
To understand the effect of appreciation of domestic currency on imports, let's break it down:
• When the domestic currency appreciates, it means the value of the domestic currency increases in relation to foreign currencies.
• As a result, the domestic currency can buy more units of foreign currency than before.
• This increase in purchasing power of the domestic currency makes imports cheaper, as the same amount of domestic currency can now buy more imported goods.
The correct answer is right because the appreciation of the domestic currency increases its purchasing power, making imports less expensive.
On the other hand, options like "Costlier" are incorrect because an appreciation of the domestic currency would not increase the cost of imports.
Similarly, "Same" is also incorrect because the appreciation of the domestic currency would have a significant impact on the cost of imports, making them cheaper rather than keeping them the same.
About This Chapter: International Trade
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Theories, Trade Policy, Exchange Rates
This chapter explores trade between nations — why countries trade, the theories of Absolute and Comparative Advantage, Balance of Payments, Exchange Rate systems (Fixed vs Flexible), and India's trade policy including tariffs, quotas, and WTO rules.
View Official ICAI SyllabusExam Strategy Tip
Understand Comparative Advantage theory thoroughly — it's the foundation of international trade. Also focus on the Balance of Payments structure and what causes deficits.
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