Which statement defines depreciation as used in currency terms?

Which statement defines depreciation as used in currency terms?

• A. A fall in the value of one currency in terms of other currencies.
• B. A rise in the general price level of goods and services.
• C. An increase in the money supply.
• D. A decrease in government spending.

Answer: (A)

Depreciation, in currency terms, means a fall in the value of a currency on the foreign exchange market relative to other currencies. When depreciation occurs, the domestic currency buys fewer units of foreign currency. For example, if the dollar used to buy 0.9 euros and now buys only 0.85 euros, the dollar has depreciated against the euro. This definition directly describes a change in relative value between currencies. Inflation is about rising prices in the economy, not the relative value of currencies. An increase in the money supply or a change in government spending are macro policy moves that can influence currency values, but they are not the definition of depreciation itself.

Depreciation, in currency terms, means a fall in the value of a currency on the foreign exchange market relative to other currencies. When depreciation occurs, the domestic currency buys fewer units of foreign currency. For example, if the dollar used to buy 0.9 euros and now buys only 0.85 euros, the dollar has depreciated against the euro. This definition directly describes a change in relative value between currencies.

Inflation is about rising prices in the economy, not the relative value of currencies. An increase in the money supply or a change in government spending are macro policy moves that can influence currency values, but they are not the definition of depreciation itself.