Which of these would cause a currency to depreciate?

Question

BlackTom AI · Accepted Answer

A decrease in demand for a currency causes its value to fall (depreciation) because foreign-exchange prices are set by supply and demand.

1) Relevant knowledge points and concepts
- Exchange rates are determined by supply and demand in foreign-exchange markets: demand for a currency represents how much foreigners (and domestic agents) want to hold or buy that currency, while supply represents how much of the currency is offered for sale. 
- Depreciation means the currency’s price (its value relative to other currencies) falls; appreciation means it rises.
- A leftward shift in demand (less desired) lowers the equilibrium price; a leftward shift in supply (less of it available) raises the equilibrium price.

2) Step-by-step reasoning
- Start with an initial equilibrium where demand D0 meets supply S0 at price P0 (the currency’s value).
- If demand for the currency decreases (people want fewer units), the demand curve shifts left to D1.
- At the unchanged supply S0, the new intersection is at a lower price P1 < P0.
- That lower price is a depreciation — the currency buys fewer foreign goods/foreign currency.

3) Intermediate steps (conceptual “calculations”)
- Let P = price (value) of currency. Equilibrium: D0(P0) = S0(P0).
- After demand fall: D1(P) = D0(P) − ΔD. New equilibrium satisfies D1(P1) = S0(P1).
- Since D1 < D0 for any given P, the solution P1 must be lower than P0 → P1 < P0.

4) Why the correct answer is correct
- A decrease in demand directly reduces the equilibrium value of the currency, so depreciation follows from standard supply-demand logic.

5) Why other options are incorrect
- “If anything makes people want more of the currency” would increase demand → appreciation, not depreciation.
- “A decrease in supply of the currency” reduces available quantity, which raises price → appreciation, not depreciation.
- “All of these” is wrong because two options would produce appreciation, not depreciation.

6) Conclusion
Therefore the correct choice is “a decrease in demand for the currency,” which matches the provided answer.

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

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