Question

Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely :
(Choose the correct alternative)

• A. to rise
• B. to fall
• C. to rise or to fall
• D. to remain unaffected

Answer 1

The correct option is B to fall

When foreign currency becomes cheaper, it indicates that demand of foreign exchange is higher than the supply of foreign exchange. Hence, other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be negative, i.e. exports will decrease and imports will increase, which will ultimately lead to fall in the national income. Hence, B is the correct option.