UPSC Exam > UPSC Questions > Which of the following have a bearing on the...
Start Learning for Free
Which of the following have a bearing on the exchange rate of a currency of a country?
Prevailing interest rates in the domestic economy.
Speculation in the foreign currency market.
Increase in the imports of a country.
Select the correct answer using the code given below.
- a)1 and 2 only
- b)2 and 3 only
- c)1 and 3 only
- d)1, 2 and 3
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
Which of the following have a bearing on the exchange rate of a curre...
Factors Affecting Exchange Rates
Exchange rates refer to the value of one currency in terms of another currency. The exchange rate of a country's currency can be influenced by several factors. In the given options, all three factors - prevailing interest rates in the domestic economy, speculation in the foreign currency market, and an increase in the imports of a country - have a bearing on the exchange rate of a currency. Let's discuss each of these factors in detail:
1. Prevailing Interest Rates in the Domestic Economy:
- Interest rates play a crucial role in determining the exchange rate of a currency. Higher interest rates attract foreign investors, leading to an increased demand for the currency. This increased demand strengthens the currency's value and raises its exchange rate.
- On the other hand, lower interest rates reduce the attractiveness of a currency, resulting in a decrease in demand and a depreciation in its value.
2. Speculation in the Foreign Currency Market:
- Speculation refers to the act of buying or selling assets, including currencies, with the expectation of making a profit from price fluctuations.
- Speculation in the foreign currency market can significantly impact exchange rates. If speculators believe that a currency will appreciate in the future, they will buy it, driving up its value. Conversely, if they anticipate a currency's depreciation, they will sell it, leading to a decline in its value.
3. Increase in the Imports of a Country:
- The balance of trade, which is the difference between a country's exports and imports, can affect the exchange rate.
- When a country experiences an increase in imports, it implies a higher demand for foreign currencies to pay for those imports. This increased demand for foreign currencies can lead to a depreciation of the country's currency.
Summary:
In summary, prevailing interest rates in the domestic economy, speculation in the foreign currency market, and an increase in the imports of a country all have a bearing on the exchange rate of a currency. These factors can influence the supply and demand dynamics of a currency, ultimately affecting its value relative to other currencies.
Exchange rates refer to the value of one currency in terms of another currency. The exchange rate of a country's currency can be influenced by several factors. In the given options, all three factors - prevailing interest rates in the domestic economy, speculation in the foreign currency market, and an increase in the imports of a country - have a bearing on the exchange rate of a currency. Let's discuss each of these factors in detail:
1. Prevailing Interest Rates in the Domestic Economy:
- Interest rates play a crucial role in determining the exchange rate of a currency. Higher interest rates attract foreign investors, leading to an increased demand for the currency. This increased demand strengthens the currency's value and raises its exchange rate.
- On the other hand, lower interest rates reduce the attractiveness of a currency, resulting in a decrease in demand and a depreciation in its value.
2. Speculation in the Foreign Currency Market:
- Speculation refers to the act of buying or selling assets, including currencies, with the expectation of making a profit from price fluctuations.
- Speculation in the foreign currency market can significantly impact exchange rates. If speculators believe that a currency will appreciate in the future, they will buy it, driving up its value. Conversely, if they anticipate a currency's depreciation, they will sell it, leading to a decline in its value.
3. Increase in the Imports of a Country:
- The balance of trade, which is the difference between a country's exports and imports, can affect the exchange rate.
- When a country experiences an increase in imports, it implies a higher demand for foreign currencies to pay for those imports. This increased demand for foreign currencies can lead to a depreciation of the country's currency.
Summary:
In summary, prevailing interest rates in the domestic economy, speculation in the foreign currency market, and an increase in the imports of a country all have a bearing on the exchange rate of a currency. These factors can influence the supply and demand dynamics of a currency, ultimately affecting its value relative to other currencies.
Free Test
FREE
| Start Free Test |
Community Answer
Which of the following have a bearing on the exchange rate of a curre...
- Option 1 is correct: In the short run an important factor in determining exchange rate movements is the interest rate differential i.e. the difference between interest rates between countries. There are huge funds owned by banks, multinational corporations and wealthy individuals which move around the world in search of the highest interest rates. If we assume that government bonds in country A pay 8 percent rate of interest whereas equally safe bonds in country B yield 10 percent, the interest rate differential is 2 percent. Investors from country A will be attracted by the high interest rates in country B and will buy the currency of country B selling their own currency.
- Option 2 is correct: Exchange rates in the market depend not only on the demand and supply of exports and imports, and investment in assets, but also on foreign exchange speculation where foreign exchange is demanded for the possible gains from appreciation of the currency. Money in any country is an asset. If Indians believe that the British pound is going to increase in value relative to the rupee, they will want to hold pounds. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.
- Option 3 is correct: When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right (i.e. demand of foreign currency increases). There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.
|
Explore Courses for UPSC exam
|
|
Similar UPSC Doubts
Top Courses for UPSCView all
Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer?
Question Description
Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer?.
Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer?.
Solutions for Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? in English & in Hindi are available as part of our courses for UPSC.
Download more important topics, notes, lectures and mock test series for UPSC Exam by signing up for free.
Here you can find the meaning of Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of
Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer?, a detailed solution for Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? has been provided alongside types of Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? theory, EduRev gives you an
ample number of questions to practice Which of the following have a bearing on the exchange rate of a currency of a country? Prevailing interest rates in the domestic economy. Speculation in the foreign currency market. Increase in the imports of a country. Select the correct answer using the code given below.a)1 and 2 onlyb)2 and 3 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'D'. Can you explain this answer? tests, examples and also practice UPSC tests.
|
|
Explore Courses for UPSC exam
|
|
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
|
© EduRev
|
Education Revolution
|
|
Signup to see your scores
go up within 7 days!
Access 1000+ FREE Docs, Videos and Tests
Takes less than 10 seconds to signup