Which action would lead to depreciation of a country's currency in the foreign exchange market?

Which action would lead to depreciation of a country's currency in the foreign exchange market?

• A. Increased supply of the domestic currency in the foreign exchange market.
• B. Increased demand for the domestic currency.
• C. A rise in domestic interest rates.
• D. A fall in the price level domestically.

Answer: (A)

In the foreign exchange market, the value of a currency is determined by supply and demand for that currency. If the domestic currency is supplied more in the market, the supply curve shifts to the right, and with the same level of demand, the price of the domestic currency in terms of foreign currency falls. That fall is depreciation—the currency is worth less relative to others. The other actions would push in the opposite direction: higher demand for the domestic currency or factors that boost its attractiveness (like higher domestic interest rates) tend to appreciate the currency, not depreciate it. A fall in the domestic price level can affect competitiveness and inflation expectations in ways that often support the currency, rather than weaken it, depending on other conditions.

In the foreign exchange market, the value of a currency is determined by supply and demand for that currency. If the domestic currency is supplied more in the market, the supply curve shifts to the right, and with the same level of demand, the price of the domestic currency in terms of foreign currency falls. That fall is depreciation—the currency is worth less relative to others. The other actions would push in the opposite direction: higher demand for the domestic currency or factors that boost its attractiveness (like higher domestic interest rates) tend to appreciate the currency, not depreciate it. A fall in the domestic price level can affect competitiveness and inflation expectations in ways that often support the currency, rather than weaken it, depending on other conditions.