Question : Which of the following factors can cause a currency appreciation?
Option 1: Increase in imports
Option 2: Decrease in interest rates
Option 3: Political instability
Option 4: Trade deficit
Correct Answer:
Decrease in interest rates
Solution : The correct answer is b) Decrease in interest rates
A decrease in interest rates can cause a currency appreciation. When a country's central bank lowers interest rates, it can attract foreign investors seeking higher returns on their investments. As a result, there is an increased demand for the country's currency to invest in assets denominated in that currency. This increased demand for the currency can lead to an appreciation in its value relative to other currencies.
It's important to note that currency movements are influenced by various factors, including economic indicators, market sentiment, geopolitical events, and monetary policies. The relationship between these factors and currency movements can be complex and can vary depending on specific circumstances and market conditions.
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