Question

Which of these is a reason a central bank might sell its domestic currency?

1) To help lower the price of imports in the home country
2) To help exporters in their home country sell goods overseas
3) To speculate, using all available market information, to make a profit
4) To discourage excessive tourism in the home country

Answer 1

A central bank might sell its domestic currency to lower the price of imports and help exporters in their home country. However, central banks generally do not engage in currency speculation for profit.

Step-by-step explanation:

A central bank might sell its domestic currency in order to achieve various objectives. One reason is to help lower the price of imports in the home country. By selling its own currency, the central bank increases the supply of the domestic currency in the foreign exchange market, making it relatively cheaper compared to other currencies. This can make imports more affordable and stimulate domestic consumption.

Another reason a central bank might sell its domestic currency is to help exporters in their home country sell goods overseas. When the central bank sells its own currency, it increases the supply of foreign currency in the foreign exchange market. This makes foreign currency relatively cheaper, which benefits exporters as they receive more foreign currency for their exports.

However, it is important to note that central banks usually do not engage in currency speculation to make a profit. Central banks primarily intervene in the foreign exchange market to stabilize their currency or achieve specific economic goals, rather than for speculative purposes.

Answer 2

A central bank might sell its domestic currency to help exporters in their home country sell goods overseas, as it can lead to a depreciated currency which makes exports cheaper for foreign buyers. correct option is B

Step-by-step explanation:

Reason for a Central Bank to Sell Its Domestic Currency

The central bank might sell its domestic currency for several strategic financial reasons, but within the options provided, the correct answer is to help exporters in their home country sell goods overseas. When a central bank supplies more of its currency to the foreign exchange markets, this can lead to a depreciation of the domestic currency, making exports more competitively priced and thus more attractive to foreign buyers. It is not done for the purpose of speculating to make a profit or to discourage tourism, nor is it meant to lower the price of imports, as this would actually have the opposite effect.

It is important to understand that central banks operate to stabilize their country's economy, not to turn a profit like private investors. Measures that promote export growth can be helpful to the balance of payments and can support domestic employment and production industries. The central bank is also constrained by the amount of foreign currency reserves it holds, implying that there is a limit to how much it can intervene in the foreign exchange market.