The correct answer is Option (4) → (C), (B), (D), (A)
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(C) The demand for foreign goods and services increases. This is the initial event or shock that will lead to a change in the exchange rate. When a country's residents want more foreign goods and services, they need more foreign currency.
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(B) The demand curve shifts upward and right to the original demand curve. An increased demand for foreign goods and services translates directly into an increased demand for foreign currency. On a graph where the x-axis is the quantity of foreign currency and the y-axis is the exchange rate (domestic currency per unit of foreign currency), an increased demand for foreign currency shifts the demand curve for foreign currency upwards and to the right.
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(D) The increase in demand for foreign goods and services result in a change in the exchange rate. This is a general consequence linking the increased demand (from C and B) to an exchange rate change. This change is specifically depreciation in this context.
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(A) Depreciation of domestic currency in terms of foreign currency. As the demand for foreign currency increases (due to increased demand for foreign goods/services), the price of foreign currency in terms of domestic currency rises. This means it takes more units of domestic currency to buy one unit of foreign currency, which is precisely the definition of domestic currency depreciation.
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