Chapter 29: Problem 14

What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?

Short Answer

Expert verified

In the context of currency, appreciation refers to an increase in value when compared to another currency, requiring fewer units to buy one unit of the other currency. Depreciation is the opposite, with a decrease in value and more units required to buy one unit of another currency. A stronger currency has increased value relative to other currencies, allowing for increased purchasing power. A weaker currency experiences a decrease in value, reducing purchasing power and requiring more units to buy goods, services, or other currencies.

Step by step solution

Definition of Appreciation

Appreciation of currency refers to the increase in value of one currency compared to another currency. This means that when a currency appreciates, it requires fewer units of that currency to buy one unit of another currency.

Definition of Depreciation

Depreciation of currency is the opposite of appreciation. It refers to the decrease in value of one currency compared to another currency. This means that when a currency depreciates, it requires more units of that currency to buy one unit of another currency.

Definition of Stronger Currency

When a currency becomes stronger, its value increases relative to other currencies. This means that the purchasing power of that currency increases, and it requires fewer units of the stronger currency to buy goods, services, or other currencies.

Definition of Weaker Currency

In contrast, when a currency becomes weaker, its value decreases relative to other currencies. This means that the purchasing power of that currency decreases, and it requires more units of the weaker currency to buy goods, services, or other currencies.

Example of Currency Appreciation

Let's consider the exchange rate between the US dollar (USD) and the Euro (EUR). If the exchange rate goes from 1 USD = 0.8 EUR to 1 USD = 0.9 EUR, it means that the US dollar has appreciated because it now buys more Euros than before.

Example of Currency Depreciation

Continuing with the previous example, if the exchange rate goes from 1 USD = 0.9 EUR to 1 USD = 0.8 EUR, it means that the US dollar has depreciated because it now buys fewer Euros than before.

Example of a Stronger Currency

If the Japanese yen (JPY) appreciates against the US dollar, it can be said that the Japanese yen has become stronger. This means that the purchasing power of the yen has increased, so it requires fewer yen to buy goods, services, or other currencies.

Example of a Weaker Currency

Conversely, if the British pound (GBP) depreciates against the Euro, it is said that the British pound has become weaker. This means that the purchasing power of the pound has decreased, so it requires more pounds to buy goods, services, or other currencies.

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