Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The Songland dollar appreciates in value
B
The Songland dollar depreciates in value
C
The value of the Euro decreases
D
There is no effect on the Songland dollar's value
Understanding the Answer
Let's break down why this is correct
Answer
When the central bank of Songland sells Euros in the foreign exchange market, it is essentially exchanging Euros for Songland dollars. This action increases the supply of Euros while increasing the demand for Songland dollars. As more Songland dollars are bought with Euros, the value of the Songland dollar is likely to rise, or appreciate, compared to the Euro. For example, if a trader can now get more Songland dollars for the same amount of Euros than before, it shows that the Songland dollar has strengthened. Therefore, selling Euros can help boost the value of the Songland dollar in the market.
Detailed Explanation
When the central bank sells Euros, it increases the supply of Euros. Other options are incorrect because Some might think that selling Euros makes the Songland dollar weaker; It's a common mistake to think that selling Euros directly lowers their value.
Key Concepts
Currency Appreciation Mechanisms
Monetary Policy
Foreign Exchange Market
Topic
Currency Appreciation Mechanisms
Difficulty
easy level question
Cognitive Level
understand
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