Q. Consider the following statements:
1.If demand for a currency rises while its supply remains constant, its value depreciates.
2.A tighter monetary policy leads to the appreciation of the currency.
3.Higher inflation in India reduces the value of the rupee against the dollar.
How many of the statements given above are correct?
Answer: B
Notes:
Explanations –
Statement 1 is incorrect. If the demand for a currency rises while its supply remains constant, its value appreciates, not depreciates. Increased demand leads to higher value in any market-driven system.
Statements 2 and 3 are correct. A tighter monetary policy (e.g., higher interest rates) reduces the supply of money in the market and attracts foreign investments, increasing demand for the currency and leading to its appreciation. Higher inflation in India compared to the U.S. makes Indian goods and services less competitive globally, reducing demand for the rupee and causing its depreciation against the dollar.
Source: The Hindu
