Under a flexible exchange rate, when the price of domestic currency in terms of foreign currency increases is called?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Appreciation of domestic currency.
Under a flexible exchange rate system, exchange rates are determined by market forces (demand and supply).
When the price of domestic currency increases in terms of foreign currency, it means that 1 unit of domestic currency can now buy more units of foreign currency than before. This is known as appreciation of the domestic currency.
For example: If ₹1 = $0.0125 earlier, and now ₹1 = $0.0130, then the rupee has appreciated.
-
Depreciation: A decrease in the value of a currency in a flexible exchange rate system, due to market forces.
-
Revaluation: An increase in the value of a currency in a fixed or managed exchange rate system, due to deliberate government action.
-
Devaluation: A decrease in the value of a currency in a fixed or managed exchange rate system, due to deliberate government action.