Discussion
Identify the CORRECT statement(s) in the context of an open economy.
Answer: B
The correct statement is When domestic currency appreciates, domestic goods become more expensive to foreign buyers.
An appreciation means each unit of foreign currency buys fewer units of domestic currency, so foreigners must spend more of their own money for the same domestic goods. If the rupee appreciates from Rs 80 to Rs 75 per dollar, a good priced at Rs 7,500 costs an American buyer $100 instead of $93.75.
The same appreciation makes foreign goods cheaper for domestic buyers, so the first statement is wrong. A depreciation works the other way: foreign goods become more expensive for domestic buyers and domestic goods become cheaper for foreign buyers, so both depreciation statements are wrong.
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