Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 - Free CFA Level 1 Practice Questions and Study Guide

The concept of currency depreciation refers to the decline in the value of a currency relative to other currencies. This typically occurs due to a variety of factors, including changes in interest rates, economic instability, or shifts in trade balances. When a currency depreciates, it means that it takes more of that currency to purchase foreign goods or services, making imports more expensive and potentially boosting exports, as domestic products become cheaper for foreign buyers. This dynamic can significantly influence economic performance, trade balances, and price levels in the domestic economy.

In contrast, inflation relates to the increase in prices of goods and services in an economy over time, rather than the value of a currency relative to others. Appreciation signifies an increase in a currency's value, while deflation involves a decrease in the general price level of goods and services. Understanding the nuances of these terms is essential for analyzing economic conditions and currency movements.