Q. With reference to the effects of inflation on foreign trade, which of the following statements is correct?

[A] Inflation makes an economy exportable items less competitive in the world market.

[B] Inflation generally leads to an increase in the value of imports as foreign goods become cheaper.

[C] Due to inflation, the volume of exports increases, while the value of exports decreases.

[D] Inflation provides an economy with the advantage of lower imports and promotes import-substitution.

Answer: D
Notes:

Explanation: Inflation gives an economy the advantage of lower imports and import-substitution because foreign goods become more expensive. While inflation makes exportable items gain competitive prices, leading to an increase in the volume of exports, the document states that the value of exports decreases.

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