Chapter 19, Problem 11P

To determine

Concept Introduction:

Appreciation of Currency:

It is referred as the rise in the value of a currency in comparison to other currencies. Consider a situation in which the value of one dollar is equal to INR 50. When it becomes equal to INR 60, it means the dollar has appreciated in comparison to INR.

Depreciation of Currency:

It is referred as the reduction in the value of a currency in comparison to other currencies. Consider a situation in which the value of one dollar is equal to INR 50. When it becomes equal to INR 40, it means the dollar has depreciated in comparison to INR.

Equilibrium in Exchange Market:

It is the point where the demand for a currency is equal to the supply of a currency in the exchange market. Under the fixed exchange rate, government intervention ensures such a point.

Fixed Exchange Rate:

This is an exchange rate system under which there is an intervention by the government to control the fluctuation and this is known as fixed exchange rate.

Nominal Exchange Rate:

The rate at which currencies are exchanged in the exchange market is known as the nominal exchange rate.

Flexible Exchange Rate:

This is an exchange rate system under which there is no intervention by the government, rather the rate is determined by the demand and supply phenomenon.

Monetary Policy:

It includes money supply changes. When money supply increases, aggregate demand curve shifts rightward and vice versa.