Question : Under a flexible exchange rate, when the price of domestic currency in terms of foreign currency increases, it is called_______
Option 1: Depreciation of domestic currency
Option 2: Appreciation of domestic currency
Option 3: Devaluation of domestic currency
Option 4: Revaluation of domestic currency
Correct Answer: Appreciation of domestic currency
Solution : A flexible exchange rate system is one in which the market's supply and demand for money determine the exchange rate. The value of the currency is free to alter in response to shifts in the supply and demand for foreign currencies under a flexible exchange rate system. Under a flexible exchange rate when the price of domestic currency in terms of foreign currency increases it is called appreciation of domestic currency.
