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      Question

      In a floating exchange rate regime, if the demand for a

      country's exports increases, its currency will typically:
      A Depreciate Correct Answer Incorrect Answer
      B Appreciate Correct Answer Incorrect Answer
      C Remain unchanged Correct Answer Incorrect Answer
      D Be devalued by the central bank Correct Answer Incorrect Answer
      E Become more volatile Correct Answer Incorrect Answer

      Solution

      • Under a  floating exchange rate , the value of a currency is determined by market forces of demand and supply.
        • An increase in demand for a country's  exports  means foreign importers need more of the domestic currency to pay for those goods.
        • This increases the  demand for the domestic currency  in the foreign exchange market.
        • With supply constant, increased demand leads to an  appreciation  (increase in value) of the domestic currency relative to other currencies.
        • Devaluation  is a deliberate policy action in a fixed or managed regime, not an automatic market outcome.

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