| Select the correct set of impact on an economy when there is an 'inflationary pressure' on it. Use the code given below: |
| 1. Domestic currency heads for depreciation |
| 2. Exports become less competitive with imports getting costlier |
| 3. Real cost of borrowing decreases |
A) 1 and 2
B) Only 2
C) 1 and 3
D) Only 3
Correct Answer: C
Solution :
[c] Inflation is directly seen converting into proportionate depreciation in the domestic currency. In such situations, exports become cheaper for other countries (which make it more competitive in the world market), besides imports becoming costlier (as the domestic currency loses value in front of the external currency). Real cost of borrowing is calculated by deducting the current rate of inflation (which is higher) from the nominal rate of interest/ borrowing' (that is the rate of interest banks announce on a certain category of loan).
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