[Solved] How does exchange rate depreciation affect inflation in an open economy like India? — Ans: It increases inflation by raising import prices | Economic Awareness

Economic Awareness - Sectors of Indian Economy

How does exchange rate depreciation affect inflation in an open economy like India?

AIt reduces inflation by lowering import prices

BIt increases inflation by raising import prices

CIt has no effect on inflation

DIt stabilizes inflation by balancing exports and imports

Step-by-Step Solution

Step 1: Understand depreciation and inflation link
Depreciation raises the cost of imports priced in foreign currency.
Step 2: Effect on inflation
Higher import prices increase overall price levels, contributing to inflation.
Final Answer:
It increases inflation by raising import prices → Option B
Quick Check:
Depreciation = inflation increases via import prices ✅

Quick Trick: Depreciation raises inflation through costlier imports.

Common Mistakes:

MISTAKES

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