Freely Floating Currency, Question: For a freely floating currency, currency

Freely Floating Currency

Question:

For a freely floating currency, currency i.____________________ occurs when the market value of a country's currency rises relative to the value of another country's currency, while currency ii._____________________ occurs when the market value of a country's currency declines relative to value of another country's currency. ii. Briefly Explain?

Answer:

(i) Appreciation

(ii) Depreciation

(iii) Market value of a currency is determined by its demand and supply, in a free currency movement model. Therefore, given the fixed supply in the short run, a rise in value means that the demand is increasing, thereby increasing the price of the currency. This price increase, measured in terms of other currency, leads to appreciation of the currency. Opposite happens in the case of depreciation.

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