📚 Learning Guide
Currency Appreciation Mechanisms
easy

To increase the value of their currency, Songland's Central Bank should _____ Euros in the Foreign Exchange Market to raise interest rates and increase demand for the Songland dollar.

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

buy

B

sell

C

hold

D

ignore

Understanding the Answer

Let's break down why this is correct

Answer

To increase the value of their currency, Songland's Central Bank should buy Euros in the Foreign Exchange Market. When the bank buys Euros, it uses its own currency, the Songland dollar, to make the purchase. This action reduces the supply of Songland dollars in the market, which can lead to higher interest rates as there is less money available for lending. As interest rates rise, more investors will want to hold Songland dollars because they can earn more from savings or investments in that currency. For example, if the Central Bank buys a large amount of Euros, it can make the Songland dollar more attractive, leading to an increase in its value.

Detailed Explanation

When the Central Bank sells Euros, it makes the Songland dollar more valuable. Other options are incorrect because Buying Euros would lower the value of the Songland dollar; Holding onto Euros does nothing to change the value of the Songland dollar.

Key Concepts

Currency appreciation mechanisms
Open market operations
Interest rates
Topic

Currency Appreciation Mechanisms

Difficulty

easy level question

Cognitive Level

understand

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