Question : Which of the following steps should taken by the central bank if there is excessive rise in the foreign exchange rate?
Option 1: Supply foreign exchange from its stock
Option 2: Demand more of other foreign exchange
Option 3: Not intervene in the market as exchange rate is determined by the market forces
Option 4: Help central government to stabilize foreign exchange rate
Correct Answer:
Supply foreign exchange from its stock
Solution : The correct answer is (a) Supply foreign exchange from its stock
Supply foreign exchange from its stock: The central bank can intervene in the foreign exchange market by supplying its stock of foreign currency reserves. By increasing the supply of foreign exchange, the central bank can help alleviate the upward pressure on the exchange rate.
The specific step taken by the central bank will depend on various factors, including the magnitude and duration of the exchange rate movement, the country's exchange rate policy framework, and the central bank's assessment of the situation.
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