A currency depreciation in the foreign exchange market will _____.

• A. make exports more expensive and imports cheaper for the domestic country
• B. make exports cheaper and imports more expensive for the domestic country
• C. increase the purchasing power of the domestic currency abroad
• D. have no effect on the prices of exports and imports

Answer: (B)

Verified step by step guidance

1. Understand the concept of currency depreciation: it means the domestic currency loses value relative to foreign currencies in the foreign exchange market.
2. Analyze the effect on exports: when the domestic currency depreciates, foreign buyers can purchase domestic goods at a lower price in their own currency, making exports cheaper and more competitive abroad.
3. Analyze the effect on imports: since the domestic currency is weaker, it takes more domestic currency to buy the same amount of foreign goods, making imports more expensive for domestic consumers.
4. Consider the purchasing power of the domestic currency abroad: depreciation reduces the purchasing power of the domestic currency when buying foreign goods or services.
5. Summarize the effects: currency depreciation makes exports cheaper and imports more expensive for the domestic country, and it decreases the purchasing power of the domestic currency abroad.