Question

Under flexible exchange rate, when the price of domestic currency in terms of foreign currency increases, it is called_______

• A. Depreciation of domestic currency
• B. Appreciation of domestic currency
• C. Devaluation of domestic currency
• D. Revaluation of domestic currency

Answer 1

The Correct Option is B

Appreciation refers to an increase in the value of domestic currency in a flexible exchange rate system.

Answer 2

Appreciation refers to an increase in the value of a country’s domestic currency relative to foreign currencies in a flexible exchange rate system. In such a system, currency values are determined by market forces, such as supply and demand, without direct government intervention.

When a currency appreciates, it means that it can buy more of foreign currencies, making imports cheaper and potentially reducing inflationary pressures. For instance, if the value of the Indian Rupee appreciates against the U.S. Dollar, Indian consumers will find it less expensive to purchase goods from the U.S.

Appreciation can occur due to factors such as an increase in demand for a country's goods and services, higher foreign investment, or favorable interest rates. While currency appreciation can benefit consumers and importers, it may hurt exporters by making their goods more expensive for foreign buyers, potentially reducing export demand.

In contrast, a depreciation of the currency would occur when the value of the currency decreases, making exports cheaper but imports more expensive. Both appreciation and depreciation play significant roles in shaping a country's trade balance and overall economic health.