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The Government of the economy attempts to affect the exchange rate:
1. Directly by buying or selling foreign currencies
2. Indirectly through monetary policy
Which of these statements is/are correct?
- a)1 Only
- b)2 Only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
Verified Answer
The Government of the economy attempts to affect the exchange rate:1. ...
- A managed-exchange-rate system is a hybrid or mixture of the fixed and flexible exchange rate systems.
- Government of the economy attempts to affect the exchange rate directly by buying or selling foreign currencies or indirectly, through monetary policy" (i.e., by lowering or raising interest rates on foreign currency bank accounts, affecting foreign investment, etc.).
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Most Upvoted Answer
The Government of the economy attempts to affect the exchange rate:1. ...
The exchange rate of a country's currency is a crucial factor in its economic growth and stability. The government of the economy can attempt to affect the exchange rate in two ways:
1. Directly by buying or selling foreign currencies:
The government can buy or sell foreign currencies in the foreign exchange market to influence the exchange rate of its currency. If the government buys its own currency, it increases the demand for the currency in the market, and its value goes up, leading to an appreciation of the exchange rate. Conversely, if the government sells its currency, it increases the supply of the currency in the market, causing a depreciation of the exchange rate.
2. Indirectly through monetary policy:
The government can also use monetary policy to influence the exchange rate of its currency. Monetary policy refers to the actions taken by the central bank to regulate the supply of money and credit in the economy. The central bank can either increase or decrease the interest rates, which in turn affects the demand and supply of the currency. An increase in interest rates attracts foreign investors, leading to an appreciation of the currency, while a decrease in interest rates discourages foreign investors, leading to a depreciation of the currency.
Therefore, both statements are correct, and the correct answer is option 'C.' The government can influence the exchange rate both directly and indirectly through monetary policy.
1. Directly by buying or selling foreign currencies:
The government can buy or sell foreign currencies in the foreign exchange market to influence the exchange rate of its currency. If the government buys its own currency, it increases the demand for the currency in the market, and its value goes up, leading to an appreciation of the exchange rate. Conversely, if the government sells its currency, it increases the supply of the currency in the market, causing a depreciation of the exchange rate.
2. Indirectly through monetary policy:
The government can also use monetary policy to influence the exchange rate of its currency. Monetary policy refers to the actions taken by the central bank to regulate the supply of money and credit in the economy. The central bank can either increase or decrease the interest rates, which in turn affects the demand and supply of the currency. An increase in interest rates attracts foreign investors, leading to an appreciation of the currency, while a decrease in interest rates discourages foreign investors, leading to a depreciation of the currency.
Therefore, both statements are correct, and the correct answer is option 'C.' The government can influence the exchange rate both directly and indirectly through monetary policy.
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The Government of the economy attempts to affect the exchange rate:1. Directly by buying or selling foreign currencies2. Indirectly through monetary policyWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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The Government of the economy attempts to affect the exchange rate:1. Directly by buying or selling foreign currencies2. Indirectly through monetary policyWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about The Government of the economy attempts to affect the exchange rate:1. Directly by buying or selling foreign currencies2. Indirectly through monetary policyWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The Government of the economy attempts to affect the exchange rate:1. Directly by buying or selling foreign currencies2. Indirectly through monetary policyWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?.
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