Question

Q. Which of the following statements is/are correct regarding the Exchange Rates System?

Select the correct code from the options given below:

• A. 1 only
• B. 2 only
• C. Both 1 and 2
• D. None of the above

Answer 1

The correct option is B 2 only

Explanation:

• Statement 1 is incorrect. Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values.
• Statement 2 is correct. The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners.