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

Appreciation of domestic currency

The correct answer is Option (2) → Appreciation of domestic currency

Flexible Exchange Rate: This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate.

Increase in exchange rate implies that the price of foreign currency (dollar) in terms of domestic currency (rupees) has increased. This is called Depreciation of domestic currency (rupees) in terms of foreign currency (dollars).

Similarly, in a flexible exchange rate regime, when the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called Appreciation of the domestic currency (rupees) in terms of foreign currency (dollars). This means that the value of rupees relative to dollar has risen and we need to pay fewer rupees in exchange for one dollar.