Currency Depreciation Factors

What Causes a Nation's Currency to Depreciate?

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Question

Which of the following would most likely cause a nation's currency to depreciate?

Answers

A. an increase in domestic real interest rates

B. higher inflation than one's trading partners and a reduction in domestic real interest rates

C. a reduction in domestic real interest rates

D. higher inflation than one's trading partners

E. an increase in exports coupled with a decline in imports

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Explanations

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A. B. C. D. E.

Higher relative inflation and a reduction in domestic real interest rates causes the demand for the nation's exports and assets to decline. This in turn causes the demand for the nation's currency todecline. Once the demand for the currency falls, the "price" of the currency (or the exchange rate) falls. This is a depreciation in the currency.

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