Which term describes an increase in a currency's value relative to others?

• A. Deflation
• B. Inflation
• C. Devaluation
• D. Appreciation

Answer: (D)

Appreciation describes a currency strengthening, its value rising relative to other currencies in the foreign-exchange market. When a currency appreciates, you can exchange more foreign currency for the same amount of your currency, or you need fewer units of foreign currency to buy your currency. This often happens when the economy is strong, interest rates are higher, or there’s increased demand for investments in that country. The practical effects include cheaper imports and, all else equal, more expensive exports. Inflation and deflation relate to the general price level of goods and services domestically, not to the currency’s value against others, so they’re not descriptions of a currency’s strength relative to other currencies. Devaluation is a deliberate lowering of a currency’s value in a fixed or pegged system, which is the opposite of appreciation. Depreciation is the broader term for a currency weakening against others.