Question

When the exchange rate of domestic currency rises in a managed floating system, it is called:

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

Hint:

Mnemonic: \textbf{F}ixed system $\rightarrow$ \textbf{R}evaluation / \textbf{D}evaluation (Government decides). \textbf{F}loating system $\rightarrow$ \textbf{A}ppreciation / \textbf{D}epreciation (Market decides).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Changes in the value of a currency are described by different terms depending on whether the exchange rate system is fixed or flexible.

Step 2: Detailed Explanation:
- Appreciation: Rise in the value of domestic currency under a flexible/floating exchange rate system (market-driven).
- Depreciation: Fall in the value of domestic currency under a flexible system.
- Revaluation: Rise in the value of domestic currency under a fixed exchange rate system (government/authority decision).
- Devaluation: Fall in the value of domestic currency under a fixed system.
In a managed floating system, the market primarily determines the rate, so a rise in the exchange rate of domestic currency is called Appreciation.

Step 3: Final Answer:
A rise in the exchange rate of domestic currency in a managed floating system is called Appreciation.