ECONOMICS
BALANCE OF TRADE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Supply of Country Y’s currency will decrease in the market for foreign exchange.
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Demand of Country X’s currency will increase in the market for foreign exchange.
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Supply of Country X’s currency will increase in the market for foreign exchange.
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Demand for Country Y’s currency will not change in the market for foreign exchange.
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Detailed explanation-1: -Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
Detailed explanation-2: -A country’s currency will rise in value when interest rates are high because higher rates will attract more foreign capital. This will lead to an increase in exchange rates and a strong currency. As a general rule, the higher the interest rates, the more foreign investment a country is likely to attract.
Detailed explanation-3: -With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise in exchange rate implies depreciation in domestic currency. It encourages exports from a country and discourages imports from rest of the world.
Detailed explanation-4: -1. In the goods market, a positive shock to the exchange rate of the domestic currency (an unexpected appreciation) will make exports more expensive and imports less expensive. As a result, the competition from foreign markets will decrease the demand for domestic products, decreasing domestic output and price. 2.