Question

Other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be : (Choose the correct alternative)

• A. Positive
• B. Negative
• C. Positive and negative both
• D. No effect

Answer 1

The correct option is B Negative

When the foreign currency becomes cheaper, its effect on the national income is likely to be negative. This is because a cheaper foreign currency implies a decrease in the one of the components of national income i.e. net exports. That is, exports will decrease and imports will increase (as imports have become cheaper), this will ultimately lead to decrease in national income.
Hence, the correct answer is option (b).