Depreciation – fall in value of exchange rate – exchange rate becomes weaker (devaluation)
Appreciation – increase in value of exchange rate – exchange rate becomes stronger.
Example of Pound Sterling depreciating against the Dollar.
£1 used to equal $2. Now £1 is only equal to $1.75
Example of Pound Sterling appreciating against the Dollar.
£1 used to equal $2. Now £1 is equal to $2.75
A depreciation in exchange rate makes exports more competitive and imports more expensive.
An appreciation in the exchange rate will tend to reduce aggregate demand (assuming demand is relatively elastic). Because exports will fall and imports increase.
An appreciation is likely to reduce inflation because:
