Q. What fiscal and monetary measures can be taken in response to the depreciation of a currency? :
1.The quantity of currency supplied would decrease
2.The Nation whose currency is depreciating would buy more foreign financial assets.
Which of the statements given above is/are correct?

[A] 1 only

[B] .2 only

[C] .Both 1 and 2

[D] Neither 1 nor 2

Answer: A
Notes:
  • If currency depreciates, its purchasing power in other countries would depreciate. That means other countries’ goods are now more expensive relative to goods in that particular country, so residents of the country would buy more domestic goods and fewer foreign goods. Buying fewer foreign goods means fewer of other countries’ currencies are needed, so a country won’t need to supply as much of its own currency in the foreign exchange market for its domestic currency.
  • If a currency depreciates, foreign financial assets would be relatively more expensive than financial assets in the domestic market. A higher price of a financial asset means a lower return, so the country (whose currency is depreciating) would buy fewer foreign financial assets