Question

Differentiate between appreciation and depreciation of domestic currency.

Answer 1

$\begin{array}{cc}\text{Appreciation of Domestic Currency}& \text{Depreciation of Domestic Currency}\\ \text{(i) It is a situation of a fall in exchange rate.}& \text{(i) It is a situation of a rise in exchange rate.}\\ \text{(ii) Less rupees are needed to buy one US\$}.& \text{(ii)More rupees are needed to buy one US\$.}\\ \text{(iii)Cause:}& \text{(iii)Cause:}\\ \text{Increase in supply of foreign exchange}& \text{Increase in demand for foreign exchange}\\ \text{or}& \text{or}\\ \text{Decrease in demand for foreign exchange}& \text{Decrease in supply of foreign exchange}\\ \text{(iv) Example: Exchange rate falls from}& \text{(iv)Example: Exchange rate rises from}\\ \text{(1 US \$ : Rs 60)to (1 US \$ : Rs 50)}& \text{(1 US \$ : Rs 60) to (1 US \$ : Rs 70)}\end{array}$