Consider the following statements: The price of any currency in the international market is decided by the 1. World Bank 2. demand for goods/services provided by the country concerned 3. stability of the government of the concerned country 4. economic potential of the country in question Which of the statements given above are correct?

QUESTION

Medium

Economy

Prelims 2012

Consider the following statements: The price of any currency in the international market is decided by the

World Bank
demand for goods/services provided by the country concerned
stability of the government of the concerned country
economic potential of the country in question

Which of the statements given above are correct?

Select an option to attempt

Explanation

Statement 1 is incorrect: The World Bank is an international financial institution that provides loans to low and middle-income countries for capital projects. It does not intervene in the international market to "decide" or set the price of currencies.

Statement 2 is correct: This is a fundamental of the Current Account. If there is high demand for a country’s exports (goods and services), international buyers must purchase that country’s currency to pay for them, driving up the currency's price.

Statement 3 is correct: This is a fundamental of the Capital Account. Political stability attracts Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). If a government is unstable, investors pull out their capital, leading to a surplus of the currency in the market and a drop in its price.

Statement 4 is considered a secondary factor: While "economic potential" attracts long-term investment, the UPSC official key for this question traditionally excludes it as a direct decider of the daily market price compared to the immediate impact of trade demand and political stability.

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