Explanation The exchange rate is the rate at which one currency is exchanged for another currency. That is, it is the quantity of domestic currency which is required to purchase another currency from the exchange market. It is determined by equating the demand for and the supply of the foreign currency. Thus, when there are any changes in the demand or supply, it will lead to the appreciation and depreciation of the exchange rate. Option (c): According to the theory, when there are changes in the demand and supply of the currency in the exchange market, it will lead to changes in the exchange rate of the currency. Appreciation is the process of increasing the value of a currency with respect to another and depreciation is vice versa. Here, the initial exchange rate was $1 = £0.5. That is, 1 dollar was equal to 0.5 Euro in the exchange market. Thus, 1 dollar was initially required to purchase 0.5 Euro. When the exchange rate changed, it became $1 = £0.75, that is, now 1 dollar was equal to 0.75 Euro and thus, the dollar could purchase more Euros or vice versa. This shows that the dollar value has appreciated whereas the Euro value has depreciated . Thus, option ‘c’ is correct. Option (a): Since the dollar was able to purchase more Euros than before, it shows us that the exchange rate of the dollar has increased against the Euro or vice versa...

The exchange rate changes.

Macroeconomics: Principles, Problems, & Policies

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ISBN: 9780077660772

Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.

Publisher: McGraw-Hill Education

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