Question

A rise in the

Canadian−dollar

price of foreign currency is referred to as

A.

a depreciation of the Canadian dollar.

B.

a gain in the relative value of the Canadian dollar.

C.

a rise in the external value of the Canadian dollar.

D.

a decrease in the exchange rate.

E.

an appreciation of the Canadian dollar.

Answer 1

Since nominal exchange rate is the ratio domestic currency and foreign currency.

Therefore when nominal exchange rate increases, the domestic currency depreciates and foreign currency appreciates. Hence domestic goods become cheaper compare to foreign goods. Hence domestic currency buys fewer units of foreign currency and the domestic currency has depreciated.

Therefore it can be said that a rise in the Canadian−dollar price of foreign currency is referred to as a depreciation of the Canadian dollar.

Hence option A is the correct answer.