Question

Please explain the below practice question. Please be detailed in your answer.

Practice question 1:

When the value of the U.S. dollar depreciates against other currencies, those individuals earning an income denominated in U.S. dollars are able to purchase more, less, or the same amount of foreign currency?

Answer 1

When the value of the U.S dollar depreciates against a foreign currency, a person earning his income in U.S dollars will be able to purchase less of the foreign currency than before.Appreciation of currency means the increase of the value of currency in relation to another currency and depreciation means the decrease in value of the currency in in relation to another currency.

Example.When the $1=75Rupees a person earning his income in dollar would be able to purchase 7500Rs for $100.Now if the dollar depreciates and becomes $1=72.00Rs then that person would only be able to get 7,200Rupees for $100.Earlier(before the depreciation of $) the individual was able to purchase RS 7500 for the same $100.Thus, a depreciation in value of $ against a foreign currency would result in lowering the ability to purchase foreign currency of an individual earning his income in US$.