question_answer

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:

When the prices of foreign currency falls, the national income is likely to fall. This is because a fall in foreign prices will lead to a decrease in the one of the components of national income i.e., net exports 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).