Fig. 1 shows the value of the maru, the currency of Meridia, in US dollars. The fall followed an increase in global demand for US exports. US$ per maru0.800...
Question 1 Report
Fig. 1 shows the value of the maru, the currency of Meridia, in US dollars. The fall followed an increase in global demand for US exports.
(a) State what happened to the external value of the maru between January and June. [1]
(b) Explain one effect of this change on Meridia's import prices. [2]
(c) Analyse one reason why the government may be concerned if the currency decrease causes increased inflation. [3]
Answer Details
(a) The external value of the maru decreased, or depreciated, from \($0.80\) to about \($0.62\) per maru. [1]
(b) When each maru buys fewer US dollars, more maru are needed to buy one US dollar. [1] Imports priced in dollars therefore become more expensive in maru. [1]
(c) More expensive imported goods and inputs raise firms' production costs and/or consumer prices. [1] Higher prices reduce households' real income and purchasing power. [1] If households reduce consumption, aggregate demand and output may fall, reducing economic growth. [1]
This is a concern because currency depreciation can create cost-push inflation through higher import prices.
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