question_answer

(i) Other things remaining constant, explain the impact of rise in foreign currency on national income.

(ii) Give any three points of difference between depreciation of currency and devaluation of currency.

After Completing the Sample Question Paper, just cross check your explanations with those given here and fill the status of questions Y (in case your explanation is correct) and N (in case your explanation incorrect).

Answer:

(i) There is no direct impact on national income of a country with change in exchange rate. But change in exchange rate has an indirect impact on national income. When exchange rate rises, domestic currency depreciates. The foreign countries can now purchase more quantity of goods and services from the same amount of foreign currency from the domestic country. Imports, tends to fall and exports tend to rise. Accordingly, aggregate demand tends to rise. A rise in AD may lead to a rise in national income. (ii) Difference between depreciation and devaluation of currency are;

Basis	Depreciation of Currency	Devaluation of Currency
Market forces of demand and supply.	Depreciation of foreign currency is determined by market forces of demand and supply.	Devaluation of foreign currency is not determined by market forces of demand and supply.
Government intervention	There is generally no direct intervention of government.	Devaluation is generally done by government itself.
Planning	It is not planned at all.	It is generally planned by government.