A currency has depreciated when:

Question

BlackTom AI · Accepted Answer

To evaluate what depreciation means, start by clarifying the effect on foreign exchange values and purchasing power abroad.
Option 1: 'that currency buys more foreign goods than it did previously.' This would imply the currency has gained value relative to foreign currencies (appreciation), making foreign goods cheaper in domestic terms. Depreciation does the opposite, so this statement is incorrect.
Option 2: 'domestic goods become more expensive to holders of that currency.' If your home currency depreciates, foreign goods become more expensive for you when you travel or import, but domestic goods priced in the domestic currency do not inherently become more expensive just because the currency depreciates. This statement misattributes the impact of depreciation on domestic prices, so it is not accurate.
Option 3: 'one unit of that currency buys more units of a foreign currency than it did previously.' That describes appreciation (the currency strengthens), not depreciation. Therefore this option is incorrect.
Option 4: 'that currency buys fewer foreign goods than it did previously.' This is the hallmark of depreciation: the domestic currency has less purchasing power abroad, so you can buy fewer foreign goods with the same amount of domestic currency. This option correctly describes the effect of depreciation.
Overall, the reasoning shows that depreciation reduces the amount of foreign goods purchasable with the domestic currency, while the other options either describe appreciation or misstate the consequences for prices and purchasing power.

A currency has depreciated when:

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