Question : Which of the following factors can influence the supply of a country's currency in the foreign exchange market?
Option 1: Interest rates
Option 2: Capital flows
Option 3: Trade balances
Option 4: All of the above
Correct Answer: All of the above
Solution : The correct answer is d) All of the above
All of the factors mentioned can influence the supply of a country's currency in the foreign exchange market.
a) Interest rates: Changes in interest rates can affect the attractiveness of a country's currency to foreign investors. Higher interest rates can attract capital inflows, increasing the supply of the currency, while lower interest rates may discourage capital inflows, reducing the supply.
b) Capital flows: Capital flows, including foreign direct investment, portfolio investment, and speculative flows, can impact the supply of a country's currency. Inflows of capital increase the supply, while outflows decrease the supply.
c) Trade balances: Trade balances, which refer to the difference between a country's exports and imports, can also affect the supply of its currency. A positive trade balance (exports exceeding imports) can lead to increased supply as foreign buyers of exports need to acquire the domestic currency to make payments.
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