Question : Appreciation and depreciation of a country's currency are primarily influenced by:
Option 1: Supply and demand dynamics in the foreign exchange market.
Option 2: Government regulations.
Option 3: International trade agreements.
Option 4: None of the above.
Correct Answer:
Supply and demand dynamics in the foreign exchange market.
Solution : The correct answer is a) Supply and demand dynamics in the foreign exchange market.
Appreciation and depreciation of a country's currency are primarily influenced by supply and demand dynamics in the foreign exchange market. The value of a currency is determined by the interactions of buyers and sellers in the market, based on factors such as interest rates, economic indicators, geopolitical events, and investor sentiment.
When there is a high demand for a currency relative to its supply, its value tends to appreciate, meaning it becomes stronger compared to other currencies. Conversely, when there is a higher supply of a currency relative to its demand, its value tends to depreciate, meaning it becomes weaker compared to other currencies.
Government regulations and international trade agreements can indirectly influence a currency's value, but the primary driver is the market forces of supply and demand.
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