ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase; right
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An increase; left
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A decrease; right
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A decrease; left
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Detailed explanation-1: -A rise in domestic interest rates will attract foreign capital inflows and thereby bring on an appreciation of domestic currency, i.e., the exchange rate and the interest rate differential move in the same direction.
Detailed explanation-2: -If a country’s balance of payments moves into deficit (the supply of domestic currency exceeds the demand for domestic currency) its exchange rates will fall/depreciate (reducing the price of domestic currency/increasing the price of foreign currency) until the overall balance of payments is in balance again.
Detailed explanation-3: -Easy monetary policy and high inflation are two of the leading causes of currency depreciation.
Detailed explanation-4: -If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.