Question

The value of the US dollar changes due to the market forces of demand and supply of foreign exchange i.e., from 1 USD = 81 to 2 USD = 161. What will this be termed as?

• A. Appreciation of rupee
• B. Depreciation of rupee
• C. Revaluation of rupee
• D. Devaluation of rupee

Answer 1

The Correct Option is B

The change in the value of the US dollar from 1 USD = 81 to 2 USD = 161 indicates that the rupee has lost value relative to the US dollar. This can be analyzed as follows: 

1. Initially, 1 USD was equivalent to 81 rupees. This is the initial exchange rate.
2. After the change, the exchange rate becomes 161 rupees for 2 USD. To find the per USD rate, divide by 2: 161/2 = 80.5.
3. Now, compare the initial rate (81) with the new exchange rate per USD (80.5):
   • If 1 USD is now less in rupees compared to before (79 > 80.5), the rupee has appreciated.
   • If 1 USD is now more in rupees compared to before (81 < 80.5), the rupee has depreciated.
4. Since 1 USD used to be 81 rupees and is now effectively 80.5 rupees, it shows that the rupee's value relative to the dollar has decreased.

Therefore, this is termed as the Depreciation of rupee.

Answer 2

The change in the value of the US dollar in relation to the Indian Rupee can be understood by examining the exchange rate movement. Initially, the exchange rate was 1 USD = 81 INR. Subsequently, it changed to 2 USD = 161 INR.

This situation can be analyzed as follows:

• Initially, 1 USD was worth 81 INR.
• Then, the rate changed to 2 USD = 161 INR, which implies 1 USD = 80.5 INR (calculated as 161 INR ÷ 2 USD).

The new exchange rate indicates that each USD now requires fewer INR to exchange, meaning it costs less in INR to buy 1 USD compared to the initial rate (80.5 INR now versus 81 INR initially).

This change means the INR has lost value relative to the USD, since it now takes more INR to purchase the same amount in USD.

Therefore, this is termed as the Depreciation of rupee.