The cost of a bag increased from $\$$8 to $12 in the US and ₹400 to ₹480 in India. What affect it has on the dollar in respect to exchange price?

Depreciated

The correct answer is Option (3) → Depreciated

Initial Situation:

• Price of bag in US = $8

• Price of bag in India = ₹400

• Implied initial exchange rate (USD/INR) = $8 / ₹400 = $0.02 per ₹1 (or ₹50 per $1)

Final Situation:

• Price of bag in US = $12

• Price of bag in India = ₹480

• Implied final exchange rate (USD/INR) = $12 / ₹480 = $0.025 per ₹1 (or ₹40 per $1)

Analysis of Exchange Rate Change:

• Initial: ₹1 could buy 0.02 dollars  or 1 dollar = ₹50

• Final: ₹1 can buy 0.025 dollar or 1 dollar = ₹40

Since ₹1 can now buy more dollars , it means the Indian Rupee has become stronger relative to the US Dollar. Conversely, if the Indian Rupee has become stronger, the US Dollar has become weaker relative to the Indian Rupee. When a currency becomes weaker in a floating exchange rate system, it is said to have depreciated.