Question : In the context of foreign exchange rates, what does the term "depreciation" refer to?
Option 1: Increase in the value of a currency
Option 2: Decrease in the value of a currency
Option 3: Stable value of a currency
Option 4: Convertibility of a currency
Correct Answer:
Decrease in the value of a currency
Solution : The correct answer is (b) Decrease in the value of a currency.
In the context of foreign exchange rates, the term "depreciation" refers to a decrease in the value of a currency relative to other currencies. When a currency depreciates, it requires more units of that currency to purchase a fixed amount of another currency. In other words, the currency becomes weaker in relation to other currencies.
Currency depreciation can occur due to various factors, such as economic factors, market forces of supply and demand, changes in interest rates, inflation differentials, political instability, and market sentiment. Depreciation of a currency can have both positive and negative effects on a country's economy. It can make exports more competitive and boost tourism and foreign investment, but it can also increase the cost of imports and potentially lead to inflationary pressures.
It is important to note that depreciation and appreciation are opposite concepts. Appreciation refers to an increase in the value of a currency.
