Question : Which of the following factors can cause a currency depreciation? Select the most appropriate answer.
Option 1: High-interest rates
Option 2: Increase in exports
Option 3: Political instability
Option 4: Trade surplus
Correct Answer: Political instability
Solution : The correct answer is c) Political instability
Political instability, such as changes in government, civil unrest, or geopolitical tensions, can lead to a loss of confidence in a country's economy and its currency. Investors may perceive political instability as a risk and seek to sell off the country's currency, leading to its depreciation.
It's important to note that currency exchange rates are influenced by a variety of factors, including economic fundamentals, monetary policy, market sentiment, and global economic conditions. The interplay of these factors can result in currency appreciation or depreciation.