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.