Which of the following is most likely to cause a depreciation in a country's currency?

• A. An increase in demand for the country's currency by foreign buyers
• B. A decrease in the domestic money supply
• C. A rise in foreign investment in the country
• D. An increase in imports relative to exports

Answer: (D)

Verified step by step guidance

1. Understand that currency depreciation means the value of the domestic currency falls relative to other currencies.
2. Recognize that currency value is influenced by supply and demand in the foreign exchange market: if demand for the currency falls or supply increases, the currency tends to depreciate.
3. Analyze how an increase in imports relative to exports affects currency demand and supply: more imports mean domestic residents need more foreign currency to pay for goods, increasing the supply of domestic currency on the foreign exchange market.
4. Note that an increased supply of the domestic currency (due to higher imports) without a corresponding increase in demand leads to a depreciation of the currency.
5. Compare this with other options: an increase in demand for the currency, a decrease in money supply, or a rise in foreign investment typically increase demand or reduce supply of the currency, which would appreciate rather than depreciate it.