A result of an exchange rate depreciation, _____ would occur as the spending patterns change in response to a change in the exchange rate.
A) expenditure switching from domestic to foreign products
B) expenditure switching from foreign to domestic products
C) expenditure switching from rural to urban producers
D) terms-of-trade deterioration

Question

Quizplus · Accepted Answer

Depreciation of a currency makes domestic products less expensive for foreigners and foreign products more expensive for domestic consumers. As a result, consumers tend to switch their expenditure from foreign to domestic products, which is indicated by option B. Option A is incorrect because expenditure does not switch from domestic to foreign products during a depreciation. Option C is irrelevant, as it does not relate to exchange rate changes. Option D is wrong because a deterioration in terms of trade refers to a decline in export prices relative to import prices, and it is not necessarily related to exchange rate movements.

A Result of an Exchange Rate Depreciation, _____ Would Occur