Prelims 2012 · Economy · Question 79
Consider the following statements: The price of any currency in international market is decided by the
- World Bank
- Demand for goods/services provided by the country concerned
- Stability of the government of the concerned country
- Economic potential of the country in question.
Which of the statements given above are correct?
Answer
2 and 3 only
1. World Bank — Incorrect. The World Bank does not decide the price of currencies in the international market; exchange rates are generally determined by forex market forces and, in some cases, central bank intervention.
2. Demand for goods/services provided by the country concerned — Correct. Higher foreign demand for a country’s exports raises demand for its currency, affecting its exchange value.
3. Stability of the government of the concerned country — Correct. Political stability improves investor confidence and capital inflows, which can strengthen demand for the currency.
4. Economic potential of the country in question — Not taken as a direct determinant here. While it may influence investor sentiment indirectly, the standard immediate factors are trade demand, capital flows, and political stability.
Hence, statements 2 and 3 only are correct.