Question

The exchange rate between the U.S. dollar and the British pound starts at \(1 = £0.5. It then changes to \)1 = £0.75. Given this change, we would say that the U.S. dollar has ______ while the British pound has _______.

a. depreciated; appreciated

b. depreciated; depreciated

c. appreciated; depreciated

d. appreciated; appreciated

Short answer

The correct option is option (c): appreciated; depreciated

Step-by-step solution

Depreciation and appreciation of currencies

An exchange rate determined by market forces can, and often does, constantly change, just as stock and bond prices do.

When a currency appreciates, fewer units are needed to buy a single unit of other currency. In contrast, in the case of depreciation purchasing power of the currency falls.

Thus, the depreciation of one currency implies an appreciation of other currency and vice-versa.

Relationship between US dollar and British pound

The initial exchange rate between the US dollar and the British pound is $1= 0.5 pounds. The change in the exchange rate is $1 = 0.75 pounds.

The purchasing power of the US dollar has increased by 0.25, as is evident from the given exchange rates.

Thus, given the changes, one can say that the US dollar has appreciated while the British pound has depreciated.