Chapter 43, Problem 3MCQ

To determine

The correct option for an increase in the supply of a currency with a fixed exchange rate.

Answer to Problem 3MCQ

Option c is correct.

Explanation of Solution

Explanation for the correct option:

c

If the country’s currency is depreciated then the price of the exports will increase which will increase the supply of the currency. In another way, the increase in supply will reduce the interest rates which demotivated the investors to invest further which will depreciate the value of the currency. Therefore, option c is correct.

Explanation for incorrect options:

a.

An increase in the supply of a currency with a floating exchange rate will decrease the demand for the currency.

b.

Appreciation of the currency is caused by a decrease in the supply of a currency with a floating exchange rate.

d.

Increase in government buying will not let the supply of the currency rise.

e.

Decrease in government buying’s not necessarily increased or decrease the supply.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.