Premlata and Monica were discussing about how the exchange rate between India (domestic country) and USA (the foreign country) changes with time due to external factors. When the price of foreign exchange falls due to change in market forces of demand and supply, what does it imply? 

Currency appreciation of India

The correct answer is Option 1: Currency appreciation of India

Explanation:

• A fall in the price of foreign exchange means less rupees are required to purchase one dollar. Suppose the exchange rate moves:
  
  • From ₹80 = $1
  • To ₹75 = $1
• This Means:
  • This means:Now you need fewer rupees to buy 1 US dollar
  • So, the Indian Rupee has gained value against US dollars.
• As, due to market forces, the price of foreign exchange (US $) has fallen, we will call it as appreciation of Indian currency and depreciation of American currency.
• Note:Currency depreciation refers to a decrease in the value of domestic currency relative to another foreign currency due to market forces. When the exchange rate falls, it means the domestic currency has lost value against foreign currency. Currency appreciation is the opposite, where the domestic currency gains value. Currency devaluation and currency revaluation are typically associated with official government actions rather than market forces.