Read the following case study paragraph carefully and answer the questions based on the same. The central bank of India (Reserve Bank of India) is the apex institution that controls the entire financial market. It's one of the major function is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the foreign exchange rate. In other words, it is the central bank's job to control a country economy through monetary policy. |
Central Bank will choose which step, if there is excessive rise in the foreign exchange rate? |
Supply foreign exchange from its stock Demand more of other currency Allow commercial banks to work under less strict environment Allow more people of domestic country to visit foreign country |
Supply foreign exchange from its stock |
The central bank will Supply foreign exchange from its stock if there is an excessive rise in the foreign exchange rate. When there is an excessive rise in the foreign exchange rate, it means that the domestic currency has depreciated significantly in comparison to other currencies. It also means that the demand of foreign currency is more than the supply resulting in an increase in the foreign exchange rate. In such a scenario, increasing supply of foreign exchange will help in filling demand and supply gap thereby helping the domestic currency to stabilise. |