ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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domestic currency loses its value in relation to a foreign currency
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there is an increase in the price of a foreign currency in terms of a domestic currency
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there is an decrease in the price of a foreign currency in terms of a domestic currency
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none of these
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Detailed explanation-1: -Appreciation occurs when the value of a currency increases in comparison to the value of another currency. Depreciation of a currency occurs when the value of a currency falls in comparison to the value of another currency.
Detailed explanation-2: -When a country’s currency appreciates in relation to foreign currencies, foreign goods become cheaper in the domestic market and there is overall downward pressure on domestic prices. In contrast, the prices of domestic goods paid by foreigners go up, which tends to decrease foreign demand for domestic products.
Detailed explanation-3: -Appreciation of domestic currency means lower price of foreign currency in terms of domestic currency. This increases the price of domestic goods for foreign buyers. This means imports become cheaper. As a result the demand for imports may rise.
Detailed explanation-4: -The exchange rate of a currency is how much of one currency can be bought for each unit of another currency. A currency appreciates if it takes more of another currency to buy it, and depreciates if it takes less of another currency to buy it.
Detailed explanation-5: -On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market. Devaluation is a decision that makes a currency lose value.