Currency Depreciation vs Appreciation

Questions and Answers

What happens to exports when domestic currency depreciates?

Exports decrease as foreign goods become cheaper.

Exports decrease because domestic goods become more expensive.

Exports remain unchanged regardless of currency value.

Exports increase as domestic goods become cheaper. (correct)

How does currency depreciation affect imports?

Imports decrease as foreign goods become more expensive. (correct)

Imports increase because foreign goods are cheaper.

Imports become less valuable due to depreciation.

Imports remain the same since currency value is irrelevant.

What is a primary effect of depreciation on national income?

National income can only increase with currency appreciation.

National income increases due to a rise in net exports. (correct)

National income remains static as exports do not affect it.

National income decreases due to higher import costs.

What does it mean when it is stated that the domestic currency has depreciated?

It now takes more of the domestic currency to buy foreign currency. Signup and view all the answers

Which statement aligns with the concept of currency depreciation?

More domestic currency is needed to buy foreign currency. Signup and view all the answers

Which scenario illustrates currency depreciation?

$1 increases in value from 80 to 83 domestic currency units. Signup and view all the answers

What is the relationship between currency depreciation and national income?

Depreciation typically leads to a rise in national income. Signup and view all the answers

Which of the following statements is true about currency depreciation?

Home currency becomes less valuable compared to foreign currencies. Signup and view all the answers

Study Notes

Currency Depreciation

Currency Depreciation is the decrease in the value of a domestic currency relative to foreign currencies, requiring more domestic currency to purchase foreign currency.
Example: If the price of $1 increases from 81 to 82 rupees, the rupee is considered to be depreciating. Similarly, a change from £5 = 64 to £4.5 = 64 indicates depreciation of the UK pound.

Effects of Currency Depreciation

Increase in Exports: As the domestic currency depreciates, goods become cheaper for foreign buyers, leading to higher export volumes.
Decrease in Imports: Domestic currency depreciation makes foreign goods more expensive, resulting in reduced imports due to increased cost in domestic currency.
Increase in National Income: The combination of rising exports and falling imports increases net exports, contributing to a higher national income, assuming other factors remain constant.

Clarifications on Economic Terms

Several phrases communicate the same concept regarding currency depreciation, notably indicating a decrease in domestic currency value.
Examples of synonymous statements include:
- The domestic currency has depreciated.
- There is a fall in the price of domestic currency.
Emphasis on understanding that depreciation causes an increase in exports and a decrease in imports, thereby raising national income.

Description

Explore the concepts of currency depreciation and appreciation in this quiz. Understand how fluctuations in currency value affect domestic and foreign transactions. Get examples that illustrate these economic principles clearly.