Q. 23 A5.0( 1 Vote )

Explain the impac

Answer :

The exchange rate is the rate at which one currency is exchanged for another currency. It is the price of one currency in terms of the price of another currency. It is the value of one currency in terms of another in the international market.

The rise in the exchange rate implies a reduction in the value of the domestic currency. Thus, more units of domestic currency would be required to be paid for obtaining one unit of foreign currency. In this situation, the domestic currency is said to be depreciated. Depreciation is the reduction in the value of the domestic currency due to the actions of the forces of demand and supply. This raises the exchange rate and can affect the national income. This can influence the national income.

Exports can be promoted by the fall in the value of the currency. When the devaluation takes place, the domestic currency becomes cheaper in the international market compared other countries currency. This will lead to the purchase of the country’s exported good from other countries. Hence the devaluation by the country will increase the exports of the country and increase the national income in the short-run. But the strategy becomes ineffective in the long-run. A country having a depreciated currency will have huge deficits in their BOP in the long-run because of the increasing import bills. The devaluation makes the imports costlier resulting in the fall in national income in the long-run.

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