Question
Explain the effect of appreciation of domestic currency on imports.
Solution
When the domestic currency appreciates, demand for imports by the native residents also increases. This is because appreciation of domestic currency implies depreciation of foreign currency. When domestic currency appreciates, imports become cheaper and there by the demand for import increases.
For example, a currency appreciation (fall in the exchange rate) from say, $1= Rs 40 to $1= Rs 38 implies that the goods from abroad become cheaper (that is, it now cost Rs 38 to purchase a commodity worth $1 instead of Rs 40 earlier). This would result in a rise in the demand for the imports.
