Question

When the exchange rate of domestic currency rises in a managed floating system, it is called:

• A. Devaluation
• B. Depreciation
• C. Appreciation
• D. Revaluation

Hint:

Mnemonic: \textbf{F}ixed system $\rightarrow$ \textbf{R}evaluation / \textbf{D}evaluation (Government decides). \textbf{F}loating system $\rightarrow$ \textbf{A}ppreciation / \textbf{D}epreciation (Market decides).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
In a flexible or managed floating system, the value of a currency is determined by market forces of demand and supply.
Step 2: Detailed Explanation:
- Appreciation: An increase in the value of the domestic currency relative to foreign currencies due to market forces.
- Depreciation: A decrease in the value of the domestic currency due to market forces.
- Devaluation: A deliberate reduction in the value of the domestic currency by the government in a fixed exchange rate system.
- Revaluation: A deliberate increase in the value of the domestic currency by the government in a fixed exchange rate system.
Step 3: Final Answer:
Since the question specifies a "rise" in currency value (increased purchasing power) in a "managed floating" system (market-driven), the correct term is Appreciation.