Consider the following statements regarding "Depreciation" of domestic currency: 1. It implies that the price of foreign currency in terms of domestic currency has increased. 2. It occurs under a fixed exchange rate system. 3. It implies that one needs to pay fewer rupees to buy a unit of foreign currency. Which of the statements given above is/are correct?

Correct Option The correct option is 1 only Explanation Currency depreciation refers to the fall in the value of a domestic currency relative to a foreign currency in a floating exchange rate system. It is determined by market forces of demand and supply, unlike devaluation, which is an official reduction in value under a fixed exchange rate regime. Statement-wise Analysis - Statement 1 is Correct: Depreciation implies that the domestic currency has become weaker. Consequently, the price of foreign currency in terms of domestic currency increases. For example, if the exchange rate moves from $1 = ₹70 to $1 = ₹80, the price of the dollar has increased in terms of rupees. - Statement 2 is Incorrect: Depreciation occurs under a floating (flexible) exchange rate system where the value is determined by market forces. Under a fixed exchange rate system, a reduction in the value of domestic currency by the central authority is termed "Devaluation". - Statement 3 is Incorrect: Since the domestic currency has lost value, one needs to pay more units of domestic currency to purchase the same unit of foreign currency. Using the previous example ($1 = ₹70 to $1 = ₹80), an individual now pays ₹80 instead of ₹70 to buy one dollar. Key Takeaway Depreciation is a market-driven fall in currency value within a floating exchange rate system, leading to an increase in the domestic price of foreign currency. Devaluation is an official reduction in value within a fixed exchange rate system.

Consider the following statements regarding "Depreciation"… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 8: Open Economy Macroeconomics

mcqmedium

Consider the following statements regarding "Depreciation" of domestic currency:

It implies that the price of foreign currency in terms of domestic currency has increased.
It occurs under a fixed exchange rate system.
It implies that one needs to pay fewer rupees to buy a unit of foreign currency.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 8

Options

A1 and 3 only
B1 only
C2 only
D1, 2 and 3

Did you get this right?

Solution

Correct Option

The correct option is

1 only

Explanation

Currency depreciation refers to the fall in the value of a domestic currency relative to a foreign currency in a floating exchange rate system. It is determined by market forces of demand and supply, unlike devaluation, which is an official reduction in value under a fixed exchange rate regime.

Statement-wise Analysis

Statement 1 is Correct: Depreciation implies that the domestic currency has become weaker. Consequently, the price of foreign currency in terms of domestic currency increases. For example, if the exchange rate moves from $1 = ₹70 to $1 = ₹80, the price of the dollar has increased in terms of rupees.
Statement 2 is Incorrect: Depreciation occurs under a floating (flexible) exchange rate system where the value is determined by market forces. Under a fixed exchange rate system, a reduction in the value of domestic currency by the central authority is termed "Devaluation".
Statement 3 is Incorrect: Since the domestic currency has lost value, one needs to pay more units of domestic currency to purchase the same unit of foreign currency. Using the previous example ($1 = ₹70 to $1 = ₹80), an individual now pays ₹80 instead of ₹70 to buy one dollar.

Key Takeaway

Depreciation is a market-driven fall in currency value within a floating exchange rate system, leading to an increase in the domestic price of foreign currency. Devaluation is an official reduction in value within a fixed exchange rate system.

Your note

More from Chapter 8: Open Economy Macroeconomics

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In a fixed exchange rate system, if there is an excess supply of foreign currency, the Central Bank must:

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Which of the following items are included in the 'Current Account' of the Balance of Payments? 1. Export of goods 2. Import of services 3. Remittances and grants 4. External Commercial Borrowings

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Consider the following statements regarding the Balance of Trade (BOT): 1. It is the difference between the value of exports and imports of goods only. 2. Export of goods is entered as a debit item in BOT. 3. A Trade Deficit arises if a country imports more goods than it exports. Which of the statements given above is/are correct?

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