A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:
A) decrease local sales as foreign competition in local markets is reduced.
B) decrease the firm's exports denominated in the local currency.
C) decrease the returns earned on the firm's foreign bank deposits.
D) decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency.
E) None of these are correct.

Question

Quizplus · Accepted Answer

Depreciation of the firm's local currency would actually increase local sales by making foreign substitutes more expensive, increase the firm's exports by making its products cheaper in foreign markets, increase the returns on foreign bank deposits when converted back to the local currency, and increase the firm's cash outflow required to pay for imported supplies as more local currency would be needed to buy the same amount of foreign currency.

A Firm Produces Products for Which Substitute Products Are Produced