Currency Depreciation Raises Import Costs

Steps:

• A reduction in currency value means depreciation, where the domestic currency buys less foreign currency.
• This affects trade by altering relative prices of goods across borders.
• Imports, priced in foreign currency, become more expensive when converted to the weaker domestic currency.
• Exports become cheaper for foreign buyers, potentially boosting export volume.

Why C is correct:

• By definition, currency depreciation increases the domestic price of imports, as more local currency is needed to purchase the same amount of foreign goods (exchange rate formula: Domestic price = Foreign price × Exchange rate).

Why the others are wrong:

• A: Trade surplus likely rises, as cheaper exports increase export demand while imports decrease.
• B: Export prices fall in foreign currency terms, making them more competitive abroad.
• D: Inflation rate likely rises due to higher import costs passing through to consumers.

Final answer: C