Economic Awareness - Sectors of Indian Economy
Which of the following best explains why a country might intervene in the foreign exchange market to prevent excessive depreciation of its currency?
Which of the following best explains why a country might intervene in the foreign exchange market to prevent excessive depreciation of its currency?
medium Q7 of 15
Step-by-Step Solution
Step 1: Understand reasons for intervention
Excessive depreciation can cause import prices to rise sharply, leading to inflation.Step 2: Purpose of intervention
Central banks intervene to stabilize the currency, thereby controlling inflation by stabilizing import prices.Final Answer:
To stabilize import prices and control inflation → Option AQuick Check:
Currency intervention = stabilize imports and inflation control ✅
Quick Trick: Intervention prevents inflation from rising due to imports.
Common Mistakes:
MISTAKES- Thinking intervention aims to make exports expensive or increase volatility.
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