Question

In order to effectively secure foreign exchange, which of the following is most likely to be used by countries experiencing severe shortages of foreign exchange?

A. Currency appreciation
B. Exchange rate flexibility
C. Currency devaluation
D. Fixed exchange rates

Answer 1

Countries with foreign exchange shortages are likely to use currency devaluation to make their exports cheaper, increase demand, and secure more foreign currency, as opposed to other exchange rate policies.

Step-by-step explanation:

Countries experiencing severe shortages of foreign exchange would most likely use currency devaluation to effectively secure foreign exchange. This approach makes the country's exports cheaper for foreigners, thus stimulating demand for the exports and increasing the inflow of foreign currency. On the other hand, currency appreciation (A) would have the opposite effect, making exports more expensive and potentially reducing foreign exchange earnings. Exchange rate flexibility (B) allows for currency values to adjust due to market conditions, which does not guarantee an increase in foreign exchange reserves. Lastly, while fixed exchange rates (D) can provide stability, they do not address the issue of securing more foreign exchange on their own.