Which of these would cause a currency to depreciate?

Question

BlackTom AI · Accepted Answer

If a country's goods and services become more expensive, its currency is likely to depreciate because international demand for that currency falls relative to supply.

1. Relevant knowledge points and concepts
- Exchange rates are set by supply and demand for a currency in foreign exchange markets. 
- Real purchasing power and relative prices matter: higher domestic prices (inflation) reduce competitiveness of exports. 
- Current account flows (exports minus imports) and capital flows (investment) affect currency demand. 
- Expectations and interest rate differentials also influence currency value: better growth or political stability typically attract capital and appreciate a currency.

2. Step-by-step reasoning
- Step 1: Domestic prices rise relative to foreign prices (goods and services more expensive).
- Step 2: Foreign buyers find exports less attractive, so demand for the country’s goods falls.
- Step 3: To buy fewer goods, foreign buyers need less of the country’s currency; demand for the currency declines.
- Step 4: At the same time, residents may import more relatively cheaper foreign goods, increasing supply of domestic currency on forex markets as they sell domestic currency to buy foreign currency.
- Step 5: Lower demand combined with higher supply of the domestic currency causes its exchange rate to fall (depreciation).

3. Calculations / intermediate steps
No numerical calculation is required here; the logic is comparative: Demand(currency) down + Supply(currency) up → Price of currency (exchange rate) down.

4. Why the correct answer is correct
More expensive domestic goods reduce export competitiveness and currency demand while potentially increasing imports; this shifts forex supply-demand toward excess supply of the domestic currency, causing depreciation.

5. Why the other options are incorrect
- "The most recent economic measures reflect even stronger growth than expected.": Stronger growth usually attracts investment and strengthens (appreciates) the currency, not depreciates it.
- "The newly elected government is proving to be stable and committed...": Improved political stability and credibility typically increase capital inflows and appreciate the currency.
- "all of these": Since the other choices would tend to appreciate the currency, this option is wrong.

6. Conclusion
Therefore, the correct choice is "The country’s goods and services become more expensive." This matches the provided answer.

Which of these would cause a currency to depreciate?Single choice

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