Question

When exchange rate in terms of domestic currency rises

• A. Exports become cheaper
• B. Imports become cheaper
• C. Exports become costlier
• D. No effect on imports

Hint:

A rise in Rs./unit-foreign-currency = rupee depreciation, which cheapens exports and raises import cost.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
Exchange rate here means the amount of domestic currency (Rupees) needed to buy one unit of foreign currency. A rise in this rate means the Rupee has depreciated (weakened).

Step 2: Why option A is correct:
When the Rupee depreciates, foreign buyers need less of their own currency to buy the same amount of Rupees, so Indian goods become cheaper for foreigners — India's exports become cheaper (more competitive) in foreign markets.

Step 3: Why option B is wrong:
Depreciation makes imports costlier, not cheaper, because Indian buyers now need more Rupees to purchase the same amount of foreign goods.

Step 4: Why option C is wrong:
This is the direct opposite of the actual effect: depreciation cheapens exports, it does not make them costlier.

Step 5: Why option D is wrong:
Imports are directly affected (they become costlier), so "no effect" is incorrect.

Final Answer:
A rise in the exchange rate (Rupee depreciation) makes exports become cheaper.