Question

If demand for foreign currency increases, what happens to the domestic currency and foreign currency?

Options

• Domestic currency depreciates and foreign currency appreciates

• Domestic currency devalues and foreign currency revalues

• Domestic currency appreciates and foreign currency depreciates

• Both currencies depreciate

Answer 1

Higher demand for foreign currency causes the exchange rate to rise. Therefore, the domestic currency depreciates and the foreign currency appreciates.