Question:
If the Sri Lankan Rupee (LKR) depreciates against the US Dollar (USD), which of the following is the most likely immediate effect?
(1) Sri Lankan imports become cheaper.
(2) Sri Lankan exports become more expensive for foreigners.
(3) The price of imported goods in Sri Lanka will rise.
(4) The trade deficit will immediately disappear.
(5) Foreign debt servicing costs will decrease.
Correct Answer:
(3)
Answer Explanation:
Depreciation means 1 USD costs more LKR. Therefore, any good imported from abroad will cost more in Rupees. This causes “imported inflation.”
Topic: Exchange Rates Year: 2024
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