Question

Which of the following statements is/are CORRECT in the context of Foreign Exchange Market?

• A. When the value of domestic currency increases vis-à-vis the value of foreign currency, the domestic currency experiences appreciation.
• B. When the value of domestic currency increases vis-à-vis the value of foreign currency, the domestic currency experiences depreciation.
• C. When the value of domestic currency decreases vis-à-vis the value of foreign currency, the domestic currency experiences depreciation.
• D. When the value of domestic currency decreases vis-à-vis the value of foreign currency, the domestic currency experiences appreciation.

Hint:

In foreign exchange markets: - Appreciation occurs when the value of the domestic currency increases relative to foreign currency. - Depreciation occurs when the value of the domestic currency decreases relative to foreign currency.

Answer 1

The Correct Option is A, C

Step 1: Analyzing statement (A):
When the value of domestic currency increases relative to the foreign currency, it means that the domestic currency has become stronger. This is termed appreciation. Hence, statement (A) is correct.
Step 2: Analyzing statement (B):
When the value of the domestic currency increases relative to the foreign currency, it does not result in depreciation; it leads to appreciation. Hence, statement (B) is incorrect.
Step 3: Analyzing statement (C):
When the value of the domestic currency decreases relative to the foreign currency, it implies that the domestic currency has become weaker. This is termed depreciation. Hence, statement (C) is correct.
Step 4: Analyzing statement (D):
When the value of the domestic currency decreases relative to the foreign currency, it leads to depreciation, not appreciation. Hence, statement (D) is incorrect.