Question

in an effort to boost export competitivness would a countrys central bank buy or sell its own currancy in the forgine exchange market and which type of currancy intervention is this

Answer 1

To enhance export competitiveness, a central bank would sell its own currency in the foreign exchange market, which is considered a currency intervention. This leads to depreciation, making exports cheaper but comes with the risks of inflation and reserve depletion. Central banks must balance these interventions to avoid negative economic consequences.

Step-by-step explanation:

To boost export competitiveness, a country's central bank might intervene in the foreign exchange market by selling its own currency. This is known as a currency intervention. By selling their own currency, the central bank increases its supply in the foreign exchange market, which can lead to a depreciation of the currency's value.

This makes the country's exports cheaper and more competitive in the global market. However, this action has trade-offs, including the risk of inflation and the cost of holding large currency reserves.

Conversely, a central bank may buy its own currency using its reserves of international currencies like the U.S. dollar or the euro. This type of intervention aims to strengthen the currency's value, potentially making imports cheaper, but could lead to a depletion of the central bank's international reserves.

Therefore, it's a balancing act for central banks to decide on the correct approach that won't exhaust their reserves or lead to significant inflation.