A rapid depreciation of a country’s home currency can lead—and has led—to serious consequences, including which of the following as a most serious consequence?

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BlackTom AI · Accepted Answer

The question asks which is the most serious consequence of a rapid depreciation of a country’s home currency. To evaluate the options, we consider how a weak currency affects prices, trade, and social outcomes.
Option 1: 'Cheap, imported goods will flood the home market.' While a depreciating currency can make imports more expensive, it does not lead to cheaper imports. In fact, depreciation raises the local currency cost of foreign goods, potentially reducing their volume rather than increasing it. So this statement misreads the basic currency-valuation effect on import prices.
Option 2: 'Imports will become more scarce.' A weaker currency tends to reduce purchasing power for foreign goods, but it does not necessarily make imports inherently scarcer due to factors like trade contracts, reserves, or supply chains. Scarcity is more about quantity and distribution than the currency per se, so this claim oversimplifies the dynamic and is not the most direct or serious consequence highlighted by depreciation.
Option 3: 'Rapidly increasing costs for basic needs will lead to social unrest.' This option aligns with a well-known and severe consequence of currency depreciation: inflation of essential goods (food, energy, shelter) as import prices rise and overall price levels climb, eroding real incomes and potentially triggering social unrest. It directly ties depreciation to consumer price pressures and social stability concerns.
Option 4: 'Imports will become more expensive.' This statement correctly describes the mechanism by which a depreciating currency raises the local currency cost of imports, since foreign prices are typically set in foreign currency. However, while this is a correct intermediate effect, the prompt asks for the most serious consequence. The increased cost of imports can contribute to inflation and hardship, but option 3 captures a broader and more impactful outcome (inflation of basic needs leading to unrest) that more directly reflects the gravity implied by the question.

In summary, option 3 identifies the most consequential outcome directly linked to rapid currency depreciation—surges in prices of essential goods that can destabilize society—whereas the other options either misstate the effect (option 1), describe secondary or less direct effects (option 2), or state a factual mechanism without elevating it to the most serious outcome (option 4).

BUSFIN 4265 SP2025 (5285) Final Exam Brandl 2e Chapters 18-19-20-21-24

A rapid depreciation of a country’s home currency can lead—and has led—to serious consequences, including which of the following as a most serious consequence?

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