The correct answer is Option 3: 2 and 4
Here’s the reasoning for each statement regarding the depreciation of domestic currency:
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It means fall in the value of foreign currency in regards to domestic currency. False. Depreciation of the domestic currency means that the value of the domestic currency falls relative to foreign currencies, not the other way around. If the domestic currency depreciates, it means that foreign currencies have become more valuable relative to the domestic currency.
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It means 1 dollar can now be exchanged for more rupees. True. When the domestic currency depreciates, it loses value relative to foreign currencies. Thus, 1 unit of foreign currency (like the dollar) can be exchanged for more units of the depreciated domestic currency (like rupees). For example, if 1 dollar was previously exchanged for 70 rupees, after depreciation, it might be exchanged for 75 rupees.
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Depreciation and devaluation can be used in place of one another. False. Depreciation and devaluation are related but distinct concepts. Depreciation occurs due to market forces in a floating exchange rate system, while devaluation is a deliberate reduction in the value of the currency by the government or central bank in a fixed exchange rate system.
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It implies that more of domestic currency is required to buy goods worth 1 dollar. True. With the depreciation of the domestic currency, it takes more units of the domestic currency to purchase the same amount of foreign goods or services. If the domestic currency has depreciated, the cost of importing goods or services priced in foreign currency will increase.
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