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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

Which statement about a rupee appreciation is most accurate for the Indian economy, other things equal?

A rupee appreciation makes Indian exports more expensive abroad and imports cheaper domestically, so net exports fall and the current account tends towards deficit. The other statements describe effects of depreciation, not appreciation.

  1. AExports become cheaper for foreign buyers, helping the current account
  2. BImports become more expensive in rupee terms, raising inflation
  3. CThe current account balance tends to move towards deficit as exports become less price-competitive and imports cheaperCorrect
  4. DAggregate demand rises because net exports increase
  5. Foreign currency debt becomes more costly to repay in rupee terms

Explanation

Appreciation makes exports dearer abroad and imports cheaper at home, so net exports fall and the current account moves towards deficit. The other options describe the effects of depreciation.

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