ECONOMICS
TRADE EXCHANGE AND INTERDEPENDENCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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lower inflation in that nation relative to the world
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higher required reserve ratios in that nation relative to the rest of the world
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decreased interest rates in that nation relative to the rest of the world
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increased demand for that nation’s currency
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Detailed explanation-1: -Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation. Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy.
Detailed explanation-2: -On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market. Devaluation is a decision that makes a currency lose value.
Detailed explanation-3: -Since the imports are paid in foreign currency, without sufficient exports, the rupee will depreciate. A high fiscal deficit will lead to the lowering of the sovereign ratings and hence reduce the demand for domestic currency in the international markets. This will lead to the depreciation of the currency.
Detailed explanation-4: -Lower interest rates will reduce speculative demand for assets and therefore reduce demand for a currency. When interest rates are low, foreign investors will be put off from investing – which will ultimately weaken a country’s currency value. If interest rates are high, then it is likely that the opposite will happen.