When the income of domestic consumers increases, their spending will Increase and thus spending on imported goods is also likely to increase. This leads to ............... of domestic currency?

Option 1 -> Revaluation is a deliberate upward adjustment of currency value by the government in a fixed exchange rate system, not market-driven.

Option 2 -> Appreciation means the currency gains value, which is the opposite of what happens when imports increase.

Option 3 -> Depreciation occurs when currency loses value due to market forces, which happens when demand for foreign currency increases to pay for imports.

Option 4 -> Devaluation is a government policy action to reduce currency value in a fixed rate system, not a market outcome.

Hence, Option 3: Depreciation -> When domestic consumers increase spending on imported goods, they need to exchange domestic currency for foreign currency. This increases the supply of domestic currency in the foreign exchange market and simultaneously increases demand for foreign currency. According to supply and demand principles, when supply of domestic currency increases, its value decreases relative to other currencies. This market-driven decrease in currency value is called depreciation. It's important to note this is different from devaluation, which is a deliberate government action in fixed exchange rate systems. -> correct