What does an increase in a country's exchange rate imply in terms of foreign currency?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Depreciation
The exchange rate is the price of one unit of foreign currency in terms of the domestic currency, for example the number of rupees paid for one US dollar. When it increases, say from ₹80 to ₹85 a dollar, more rupees are needed to buy the same dollar, so the rupee has lost value against the foreign currency.
This fall in the value of the domestic currency against a foreign currency is called depreciation.
Why the other options are incorrect
Option (1) Appreciation — Incorrect. It is the opposite change: a fall in the exchange rate, when fewer rupees buy a dollar and the rupee gains value.
Option (2) Speculation — Incorrect. It is buying or selling a currency to profit from an expected change in its rate, not a change in the rate itself.
Option (4) Dirty Floating — Incorrect. It is a managed float: the market sets the rate, but the central bank steps in now and then to limit large swings.