Final answer:
Depreciation refers to the loss in an asset's value over time and can also denote the decrease in value of a currency relative to others. Expected currency depreciation results in increased supply and decreased demand for the currency, affecting exchange rates and financial decisions.
Step-by-step explanation:
Depreciation is the loss in an asset's value over time. This process occurs because assets such as equipment, vehicles, or buildings wear out and become less efficient or obsolete due to technological advancements. In economic terms, expected depreciation in a currency can lead individuals and businesses to sell off that currency, anticipating a loss in its value. As this happens, there will be an increase in the supply of the currency and a decrease in demand for it. For example, if there is expected depreciation in the British pound, we would see an increase in the supply of pounds and a decrease in demand, resulting in the pound's value decreasing relative to other currencies like the dollar.
The concept of depreciation is intertwined with the business cycle, as investments in capital goods are influenced by their depreciation rates over time. When discussing international finances, depreciation also refers to the reduction in the value of one currency compared to another, notably reflected in the exchange rate.