Answer (C) is correct . Assuming that exchange rates are allowed to fluctuate freely, a nation’s currency will appreciate if the demand for it is constant or increasing while supply is decreasing. For example, if the nation decreases its imports relative to exports, less of its currency will be used to buy foreign currencies for import transactions and more of its currency will be demanded for export transactions. Thus, the supply of the nation’s currency available in foreign currency markets decreases. If the demand for the currency increases or does not change, the result is an increase in (appreciation of) the value of the currency.
Answer (A) is incorrect because An increase in imports drives down the value of the nation’s currency.
Answer (B) is incorrect because A high rate of inflation devalues a nation’s currency.
Answer (D) is incorrect because Lower interest rates relative to those in other countries discourage foreign investment, decreases demand for the nation’s currency, and reduces its value.
|
