Which of the following will be the outcome if an economy is under the

Which of the following will be the outcome if an economy is under the inflationary pressure?

1. Domestic currency heads for depreciation.
2. Exports become less competitive with imports getting costlier.
3. Cost of borrowing decreases.
4. Bondholders get benefitted.

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2″ option2=”2 and 3″ option3=”1 and 3 only” option4=”1, 3 and 4″ correct=”option1″]

This question was previously asked in

UPSC CDS-2 – 2016

The outcome if an economy is under inflationary pressure will be that domestic currency heads for depreciation and exports become less competitive.

Inflation reduces the purchasing power of a currency. If a country experiences higher inflation relative to its trading partners, its goods become more expensive for foreigners, reducing the competitiveness of exports. This higher domestic price level and reduced export competitiveness often lead to a decrease in demand for the domestic currency on the international market, potentially causing it to depreciate.

Statement 1 is correct because high inflation typically leads to currency depreciation. Statement 2 is correct because inflation makes domestically produced goods more expensive, hurting export competitiveness. Statement 3 is incorrect; inflation generally leads to higher nominal interest rates, increasing the cost of borrowing, though real interest rates might vary. Statement 4 is incorrect; bondholders, who receive fixed nominal payments, are typically harmed by unexpected inflation as the real value of their payments decreases.

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