A depreciation of the domestic currency can be caused by ________. 1. a decrease in the...

A depreciation of the domestic currency can be caused by ________.

1. a decrease in the domestic interest rate and the expectation of an increase in the value of the domestic currency.

2. a decrease in the domestic interest rate and expectation of a decrease in the value of the domestic currency.

3. the expectation of an increase in the value of the domestic currency.

4. an increase in the domestic interest rate.

Expert Solution

The dollar will depreciate when the value of dollars decrease against another currency.

In case more increase in the demand for dollar will lead to appreciation of dollars and vice-versa.

In case of increase in the supply of dollars, the dollar will depreciate and vice-versa.

If the people expect that value of domestic currency will decrease in future, they demand less domestic currency and they demand for foreign currency. Hence foreign currency appreciate and domestic currency appreciates. When domestic interest rate decreases, the people prefer to invest in the foreign currency and therefore demand for domestic currency decrease, so domestic currency depreciated.

Hence it can be said that a depreciation of the domestic currency can be caused by a decrease in the domestic interest rate and expectation of a decrease in the value of the domestic currency.

Hence option 2 is the correct answer.

Rahul Sunny answered 2 years ago

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