ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Central banks do not usually hold any reserves of foreign currency but simply acquire it as the need arises.
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True
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False
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Either A or B
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None of the above
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Explanation:
Detailed explanation-1: -Most central banks oblige depository institutions to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved significantly over time.
Detailed explanation-2: -To maintain liquidity in case of an economic crisis. A central bank can step in and exchange its foreign currency for the local currency ensuring companies can continue to import and export competitively.
Detailed explanation-3: -The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation. This reassures foreign investors, who return to the economy.
There is 1 question to complete.