What measures might a government take to prevent its currency's external value from dropping ?
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Answer: C. Buy its own currency with foreign reserves
Explanation
A central bank can support its currency's external value by purchasing its own currency. Option C correctly identifies this intervention using foreign exchange reserves. Buying domestic currency increases its demand on foreign exchange markets, lifting its price. Central banks maintain reserves of foreign currencies and gold to defend exchange rates. Selling foreign reserves to buy domestic currency reduces the circulating supply of local money. This intervention helps counteract downward speculative pressure during balance of payment crises.
Defending an exchange rate requires substantial foreign reserves and disciplined monetary policy. Governments use these interventions to prevent runaway inflation caused by devalued currencies. Managed float regimes rely on such central bank operations to smooth excessive exchange volatility. Option A reducing interest rates would weaken the currency further by inducing capital outflows. Option B selling its own currency would increase supply and drive its external value down. Option D increasing spending would stimulate domestic demand and potentially worsen trade deficits.
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Answer: C. decrease, increase
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Answer: A. USA
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Q5. Why do top footballers generally earn more than lecturers ?
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Q6. What actions might the government take to curb cyclical unemployment ?
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Answer: D. Reduce government expenditure
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