Question

If the currency of your country is depreciating, this should __________ exports and __________ imports.

Answer 1

Answer:

Stimulate; discourage.

Explanation:

Depreciation can be defined as a process in which the monetary or financial value with respect to an asset decrease or falls over time as a result of wear and tear.

This ultimately implies that, depreciation is a process which typically involves the general fall in the value of an asset such as currency, plant equipment or machinery etc over a specific period of time.

Basically, in a floating exchange rate system, a fall or decline in the value of a currency with respect to another currency is generally referred to as currency depreciation. Currency depreciation can stimulate or improve a country's export value, if the depreciation occurs gradually and in an orderly manner because it will make the exported goods cheaper to the foreign customers. Thus, this would encourage willing investors to invest in the economy of that particular country.

Hence, if the currency of your country is depreciating, this should stimulate exports and discourage imports because currency depreciation increases a country's trade deficit (balance of trade) by enhancing the competitiveness of locally manufactured (domestic) goods in foreign markets (countries) and consequently, making foreign goods to become more expensive due to its lesser competitiveness in the domestic market.