What does an increase in a country's exchange rate implies in terms of foreign currency?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Depreciation
The exchange rate here is quoted the Indian way — the number of units of domestic currency needed to buy one unit of foreign currency. When that rate rises, say from ₹80 to ₹85 per dollar, more rupees are needed for the same dollar, so the domestic currency has lost value. That fall in value is depreciation.
Appreciation is the opposite movement, speculation is trading in a currency in the hope of profit from future rate changes, and dirty floating is a managed float in which the central bank intervenes to steady an otherwise market-determined rate.