The local currency is the Icelandic króna ISK, and its value collapsed quite dramatically during the 2008 economic crisis. As of November 2015 it had recovered to trade at around €1 = kr 141. This has also made local prices more affordable for the visitor, although the prices of imported goods have risen rapidly.
Just about every establishment in Iceland will accept a credit card, including taxis, gas stations, souvenir stands, and even the most remote guest house, so it is not necessary to carry large amounts of Icelandic currency. However, due to the currency's instability some credit cards are still wary of króna transactions, so check with your bank before you go and don't rely entirely on plastic.
Following the 2008 economic crisis, foreign trading in the króna has been restricted, so you cannot buy króna outside of Iceland. It is best to get cash from an ATM when you arrive, although you could easily go your whole trip just using credit cards.
Typical Icelandic products that make good souvenirs include:
Icelandic wool products. Icelandic sheep are a unique breed that produce a soft and durable wool and Icelandic woollen goods hats, gloves etc. are soft and warm; don't just buy them for other people if you plan to visit the interior.
Arts and crafts. Iceland has a huge number of excellent little craft shops that sell products from musical baskets and wonderful porcelain sculptures to paintings, glasswork and jewellery. The National Galleries tend to carry the same artist's work in the gift shops.
Local music. There is a plethora of interesting local music CDs beyond just Björk and Sigur Rós worth hunting for. Obscurities worth picking up include Ólafur Arnalds (http://olafurarnalds.com/), Eberg (http://www.eberg.net), Hera (http://www.herasings.com), Retro Stefson, FM Belfast, Worm is Green, Múm, Singapore Sling and Bellatrix. Be warned that many of these CDs are often available back home as imports for much lower prices. CDs tend to cost kr 1500-2000.
Getting to Iceland can be done fairly cheaply: Icelandair offer many excellent fares and promotions, particularly when flying from the USA or Canada. It's possible to get a flight from New York for as little as $200 €150/£130 by booking early. Icelandair also offer connections to Europe, but the European low-cost airline, EasyJet, offer cheaper flights from the UK London, Manchester and Edinburgh for as little as £25 €30/$40 + baggage costs. Icelandic budget carrier Iceland Express has recently been bought over by WOW Air, and also offers low-cost fares from major European cities from €80 £70/$110 + baggage costs.
However, as soon as one steps off the plane the situation changes quite drastically - prices in Iceland can be vastly higher than in other parts of Europe due to the high import duties and the 25.5% VAT rate, particularly for alcohol, foreign foods, clothing, etc. For example, many retail goods can be 3-4 times more expensive than in North America. Nonetheless, as Iceland is recovering from the financial meltdown, bargains can still be found due to the low value of the currency.
If you are not a permanent resident of Iceland, and you spend 6000 ISK or more on goods that you are bringing out of the country within 3 months of purchase, you can obtain a refund for VAT when leaving Iceland from Keflavik airport. Check out Keflavik Airport's tax refund page.
There are many ways to cut costs on transport, accommodation and food, especially if you are in Iceland to see nature and you have some experience and a spirit for adventure. Check out this blog post.
Useful discount card schemes exist for tourists, the two most significant being Norden Voyager Card, operated by the Norden Association of Iceland, and Reykjavik City Card, operated by the City of Reykjavik.
When shopping for food or other basic necessities, look for the Bónus or Krónan shops, as they offer considerably lower prices than the others. This is at the expense of choice, of course. Downtown Reykjavik is also home to several second-hand stores like Red Cross and Salvation Army, which can come in handy for buying cheap warm layers.
Expect to spend around kr 650-900 on a pint of beer or glass of wine, kr 1500-2000 for a pizza for one person, kr 350 on a city bus ride and kr 330- 500 for a coffee or espresso drink.
Cigarettes cost around kr 950 for a packet of 20. Be aware that the law in Iceland states that cigarettes must not be visible in shops, however most gas stations, supermarkets and newsagents sell them. Buy a duty free carton at the airport when you arrive.