Question

Q. Which of the following factors can affect exchange rates?

Select the correct answer using the codes given below:

• A.
  1 only
• B.
  2 only
• C.
  1 and 2 only
• D.
  1, 2 and 3

Answer 1

The correct option is D

1, 2 and 3
Explanation:

Statement 1 is correct: Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency.

Statement 2 is correct: A country’s current account reflects the balance of trade and earnings on foreign investment. A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates the exchange rate of its domestic currency.

Statement 3 is correct: Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.