The key difference is that exacerbate means to make a problem or situation worse, while exaggerate means to represent something as greater or more extreme than it really is.
Yes, exaggeration can sometimes be used in a positive or humorous way, such as when telling an entertaining story or emphasizing a point. However, exacerbating a situation is almost always negative.
Context matters in English because the meaning of words can vary based on the surrounding words, phrases, or situation. Words often have multiple meanings, and the intended sense becomes clear through the context in which they are used.
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