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Posted 6 months ago

An increase in business optimism in Maxistan has changed the real interest rate in Maxistan which has resulted in a change in the flow of financial assets between Maxistan and its trading partners and impacted the value of Maxistan's currency.

Which of the following describes an appropriate action that the central bank of Maxistan could take to offset the change in the value of Maxistan's currency?

Choose 1 answer:
(A) Buy its currency or sell another country's currency.
(B) Increase interest payments made on excess reserves held by banks
(c) Increase the demand for money
(D) Sell its currency or buy another country's currency.
(E) Sell bonds
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Answer from Sia
Posted 6 months ago
Solution by Steps
step 1
To address the change in the value of Maxistan's currency due to increased business optimism, we need to understand the effects of such optimism on the economy. Increased business optimism typically leads to increased investment and potentially higher real interest rates as demand for money increases
step 2
Higher real interest rates attract foreign capital, increasing the flow of financial assets into Maxistan. This increased demand for Maxistan's currency would appreciate its value
step 3
To offset an appreciation of the currency, the central bank could intervene in the foreign exchange market. Selling its own currency or buying another country's currency would increase the supply of its currency, thereby counteracting the appreciation
step 4
Among the given options, the action that aligns with the need to increase the supply of Maxistan's currency in the foreign exchange market is to sell its currency or buy another country's currency
Answer
D
Key Concept
Foreign Exchange Market Intervention
Explanation
To offset an appreciation of a country's currency, a central bank may intervene by selling its own currency or buying foreign currency, increasing the supply of its currency and thus decreasing its value.

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