Economic Awareness - Sectors of Indian Economy
Which of the following best explains why a country with a fixed exchange rate system might experience currency depreciation?
Which of the following best explains why a country with a fixed exchange rate system might experience currency depreciation?
hard Q9 of 15
Step-by-Step Solution
Step 1: Understand fixed exchange rate system
In fixed system, central bank maintains currency value by using reserves.Step 2: Analyze causes of depreciation under fixed regime
Persistent balance of payments deficit forces central bank to use reserves to support currency, depleting reserves and causing depreciation pressure.Step 3: Evaluate other options
Increasing reserves or buying domestic currency supports currency; FDI inflows strengthen currency.Final Answer:
Persistent balance of payments deficit depletes reserves → Option AQuick Check:
Balance of payments deficit = currency depreciation pressure ✅
Quick Trick: Deficit drains reserves, weakening fixed currency.
Common Mistakes:
MISTAKES- Confusing reserve accumulation with depreciation cause.
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