Question

when the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the domestic currency
has depreciated.
has appreciated.
is overvalued.
is undervalued.

Explanation:

Define exchange rate relationship

Using the Currency Depreciation Effects knowledge point

$$ E = \frac{\text{USD}}{\text{Foreign Currency}} $$

A decrease in the equilibrium dollar price of a foreign currency means \(E\) decreases.

Analyze domestic currency value

Using the Currency Depreciation Effects knowledge point

$$ \text{Value of USD} = \frac{1}{E} $$

Since \(E\) decreases, \(\frac{1}{E}\) increases, meaning the domestic currency (dollar) has appreciated.

Answer:

• has depreciated.
• has appreciated. (Correct answer)
• is overvalued.
• is undervalued.