Unit 16.2

Question 1

Consequences of Exchange Rate Changes on Inflation Rate

Answer 1

Depreciation of currency may lead to cost-push inflation, as imports (like oil) become pricier, raising production costs.
Appreciation can cause demand-pull inflation if it leads to increased demand for exports due to lower prices.

Question 2

Consequences of Exchange Rate Changes on Economic Growth

Answer 2

Currency depreciation may boost exports by making them cheaper but can hinder growth if the country relies on imported raw materials.
Appreciation could lead to reduced economic growth if it makes exports less competitive.

Question 3

Consequences of Exchange Rate Changes on Unemployment

Answer 3

Appreciation might lead to higher unemployment in export industries due to decreased competitiveness.
Depreciation can decrease unemployment by making exports more competitive and boosting domestic industries.

Question 4

Consequences of Exchange Rate Changes on Current Account Balance

Answer 4

Depreciation might improve the current account if export and import demand is elastic.
The effect on a net importer’s trade deficit can vary; may improve or worsen depending on the response of exporters and importers to price changes.

Question 5

Consequences of Exchange Rate Changes on Standards of Living

Answer 5

Appreciation in wealthy countries can improve living standards by making imports cheaper.
For developing countries, appreciation might harm sectors like tourism but boost the value of remittances.
Depreciation could hurt living standards if it leads to inflation, but it might improve them through stronger export industries.