Question

If the central bank of country k wishes to increase the value of its currency on foreign exchange markets, it can do which of the following?

a.Buy the currencies of other countries b.Increase the domestic money supply in Country Z c.Increase the income tax in Country Z d.Raise interest rates in Country Z e.Increase tariffs in Country Z

Answer 1

To increase the value of its currency, the central bank of country K can raise interest rates, which attracts foreign investment and increases demand for the domestic currency. Other actions like buying foreign currencies or increasing the domestic money supply could lead to inflation and devaluation.

Step-by-step explanation:

If the central bank of country K wishes to increase the value of its currency on foreign exchange markets, the most direct action it can take is to raise interest rates in Country K. Higher interest rates tend to attract foreign investment, increasing demand for the domestic currency and thereby driving up its value. Other options such as buying the currencies of other countries, increasing domestic money supply, increasing income tax, or increasing tariffs, do not directly target the exchange value of the currency. Specifically, option (a) buying currencies of other countries would actually decrease the value of the domestic currency if the central bank is printing more of its own currency to finance those purchases, thus adding to the domestic money supply and potentially causing inflation. On the contrary, a central bank that wants to strengthen its currency might use foreign reserves to buy its own currency on the open market, but this is limited by the reserves available to the central bank.

Answer 2

To increase the value of its currency, the central bank of Country K can raise interest rates to attract foreign investment, thereby increasing demand for its currency. Directly intervening in foreign exchange markets is another option, but measures like increasing the money supply, income tax, or tariffs are not effective for this purpose.

Step-by-step explanation:

When the central bank of Country K wishes to increase the value of its currency on foreign exchange markets, there are several measures it could consider. However, based on the material provided and standard economic practices, one of the most direct approaches would be to intervene in the foreign exchange markets directly.

If the central bank opts to raise interest rates in Country K, this could attract foreign capital, as investors seek higher returns on investments in Country K's currency, therefore increasing demand for it and thus its value. This practice, while effective, can have wide-ranging impacts on the economy and must be used carefully to avoid undesirable side effects like slowing economic growth.

On the other side, increasing the money supply would likely have the opposite effect by devaluing the currency, as it increases the amount of currency in circulation, potentially leading to inflation. Similarly, options like increasing income tax, increasing tariffs, or buying other countries' currencies do not directly lead to an increase in the value of Country K's currency and sometimes can be counterproductive to the stated goal.