Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Sell Euros to the market while buying Songland dollars
B
Increase interest rates by buying government bonds
C
Decrease the supply of Songland dollars in the market
D
Lower the reserve requirements for banks in Songland
Understanding the Answer
Let's break down why this is correct
Answer
If Songland's Central Bank wants to increase the value of its currency against the Euro, it can raise interest rates. When interest rates go up, saving money in Songland becomes more attractive because people earn more from their savings. This attracts foreign investors who want to take advantage of the higher returns, leading them to buy Songland’s currency. As more people buy this currency, its value increases compared to the Euro. For example, if someone in Europe sees that they can earn more interest by investing in Songland, they might exchange their Euros for Songland currency, causing its value to rise.
Detailed Explanation
Increasing interest rates makes saving money more attractive. Other options are incorrect because Selling Euros while buying Songland dollars might seem like it would help, but it doesn't create real demand for the dollar; Decreasing the supply of Songland dollars might sound good, but if people don't want to use them, it won't help.
Key Concepts
Currency Appreciation
Monetary Policy
Exchange Rates
Topic
Currency Appreciation Mechanisms
Difficulty
medium level question
Cognitive Level
understand
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