Question

What are the effects of exchange rate appreciation and depreciation on the domestic economy?

Answer 1

If the exchange rates appreciate in a domestic economy, the home currency becomes more valuable viz a viz the foreign currency and as a result, more foreign currency can be purchased with the same amount of home currency. This means more imports can be carried out and would be beneficial to the importers of the country. If, on the other hand, the home currency depreciates viz a viz the foreign currency, this would make imports costlier and help the exporters as they would now earn more domestic curreny once their foreign currency revenue is converted to domestic currency. As Current account is the difference between exports and imports, an appreciation in currency would decrease the current account deficit and a depreciation would increase the current account deficit.