Consider the following statements regarding how exchange rates affect the supply and demand of goods:
1. Changes in exchange rates affect the cost of imports and exports by altering their relative prices in foreign and domestic markets.
2. A rise in exchange rates leads to an increase in the demand for a country's exports while making imports cheaper.
3. Significant fluctuations in exchange rates can impact foreign tourism and investments in a country.
4. A decrease in exchange rates makes foreign goods cheaper, increasing the domestic demand for imports.

Which of the statements given above are correct?
(a) 1, 3, and 4
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2, and 3

Question

Consider the following statements regarding how exchange rates affect the supply and demand of goods:
1. Changes in exchange rates affect the cost of imports and exports by altering their relative prices in foreign and domestic markets.
2. A rise in exchange rates leads to an increase in the demand for a country's exports while making imports cheaper.
3. Significant fluctuations in exchange rates can impact foreign tourism and investments in a country.
4. A decrease in exchange rates makes foreign goods cheaper, increasing the domestic demand for imports.

Which of the statements given above are correct?
(a) 1, 3, and 4
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2, and 3

ONLiNE UPSC · Accepted Answer

Statement 1 is correct : Changes in exchange rates directly impact the cost of imports and exports by making them relatively more or less expensive in foreign and domestic markets.
Statement 2 is not correct : A rise in exchange rates generally makes exports more expensive for foreign buyers and imports cheaper for domestic consumers (not the other way around).
Statement 3 is correct : Significant changes in exchange rates can indeed influence foreign tourism (as it becomes cheaper or more expensive) and investments (as the cost of doing business changes).

Statement 4 is not correct : A decrease in exchange rates makes foreign goods more expensive, which reduces demand for imports, not increases it.

Exchange Rates

Impact on Supply and Demand of Goods

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M Question 1	⏱ 0
Consider the following statements regarding how exchange rates affect the supply and demand of goods: 1. Changes in exchange rates affect the cost of imports and exports by altering their relative prices in foreign and domestic markets. 2. A rise in exchange rates leads to an increase in the demand for a country's exports while making imports cheaper. 3. Significant fluctuations in exchange rates can impact foreign tourism and investments in a country. 4. A decrease in exchange rates makes foreign goods cheaper, increasing the domestic demand for imports. Which of the statements given above are correct? (a) 1, 3, and 4 (b) 1 and 3 only (c) 2 and 4 only (d) 1, 2, and 3