HELP in economics p1 nov o9 q 29

[danishjan]

plz tell me why the answer is not c??

 

[diskfrisker]

let me explain it to you... the govt. wishes to appreciate its currency in a free floating exchange rate system(in which forces of demand and supply act). The only way to do this is by creating shortage in the market(FOREX) -i.e- Demand for domestic currency should rise and supply should fall. Applying this the most suitable answer is B. where the govt. reduces the demand of foreign currency to its citizens meaning more domestic currency demand -i.e- Exchange rate would appreciate.

C says that govt. should provide subsidies to exporters?? what would be the point of doing that? If you think that exports become cheaper and demand for money increase..... it will be applicable in the long-run when demand for exports is elastic.....
Hope this helps.
Abdullah Gilani
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