Question

Identify the CORRECT statement(s) in the context of an open economy.

• A. When domestic currency appreciates, foreign goods become more expensive to domestic buyers.
• B. When domestic currency appreciates, domestic goods become more expensive to foreign buyers.
• C. When domestic currency depreciates, foreign goods become less expensive to domestic buyers.
• D. When domestic currency depreciates, domestic goods become more expensive to foreign buyers.

Hint:

Remember: Appreciation makes imports cheaper and exports costlier, while depreciation makes imports costlier and exports cheaper.

Answer 1

The Correct Option is B

Step 1: Understand currency appreciation and depreciation.
Currency appreciation means the domestic currency becomes stronger relative to foreign currencies.
As a result, domestic buyers can purchase more foreign currency using the same amount of domestic currency. Therefore, imported foreign goods become cheaper for domestic consumers.
Currency depreciation means the domestic currency becomes weaker relative to foreign currencies.
As a result, foreign goods become more expensive for domestic consumers, while domestic goods become cheaper for foreigners.

Step 2: Analyze option (A).
Option (A) states that when domestic currency appreciates, foreign goods become more expensive to domestic buyers.
This is incorrect because appreciation increases the purchasing power of domestic currency, making foreign goods cheaper rather than more expensive.
Hence, option (A) is incorrect.

Step 3: Analyze option (B).
When domestic currency appreciates, foreigners require more of their own currency to buy domestic goods.
Thus, domestic goods become relatively more expensive for foreign buyers.
Therefore, option (B) is correct.

Step 4: Analyze option (C).
When domestic currency depreciates, imports become costlier because more domestic currency is needed to buy foreign currency.
Therefore, foreign goods become more expensive, not less expensive, to domestic buyers.
Hence, option (C) is incorrect.

Step 5: Analyze option (D).
When domestic currency depreciates, domestic goods become cheaper for foreign buyers because foreigners can now buy more domestic goods using their currency.
Thus, domestic goods do not become more expensive to foreign buyers.
Hence, option (D) is incorrect.

Step 6: Final conclusion.
Only statement (B) correctly explains the effect of currency appreciation in an open economy.
Therefore, the correct answer is
\[ \boxed{(B)} \]