Consider the following statements:

The price of any currency in 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?

1. 1, 2, 3 and 4
2. 2 and 3 only
3. 3 and 4 only
4. 1 and 4 only

Explanation

Statement 1 is incorrect

• The World Bank does not set the price of a currency. Currency values are primarily determined by market forces such as supply and demand in the foreign exchange markets.

Statement 2 is correct

• The demand for a country’s goods and services influences its currency value. Higher demand for exports can lead to higher demand for the country’s currency, which can increase its value.

Statement 3 is correct

• Political stability and confidence in the government play a significant role in determining currency value. A stable government generally attracts investment and strengthens the currency.

Statement 4 is incorrect

• The economic strength of a country, including its GDP, industrial output, and trade balance, influences its currency. But it is more relevant to statement 3, as the economic potential is reflected in the stability and outlook of the country’s government and market conditions.

Answer: (b) 2 and 3 only; Difficulty Level: Easy