Question : An increase in the nominal exchange rate indicates:
Option 1: Appreciation of the domestic currency.
Option 2: Depreciation of the domestic currency.
Option 3: No change in the value of the domestic currency.
Option 4: Inflation in the domestic economy.
Correct Answer: Appreciation of the domestic currency.
Solution : The correct answer is (a) Appreciation of the domestic currency.
An increase in the nominal exchange rate means that the value of the domestic currency has increased relative to another currency. This indicates that it now takes more units of the foreign currency to buy one unit of the domestic currency. Therefore, the domestic currency has appreciated in value.
Conversely, a decrease in the nominal exchange rate would indicate depreciation of the domestic currency, meaning that it takes fewer units of the foreign currency to buy one unit of the domestic currency.
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