Question : Which of the following policies can a government adopt to prevent excessive currency appreciation?
Option 1: Capital controls.
Option 2: Foreign exchange market interventions.
Option 3: Fiscal stimulus.
Option 4: All of the above.
Correct Answer: All of the above.
Solution : The correct answer is d) All of the above.
A government can adopt various policies to prevent excessive currency appreciation, as follows:
a) Capital controls: This refers to the implementation of restrictions or regulations on the flow of capital in and out of a country. Capital controls can help limit speculative investment inflows and prevent excessive currency appreciation. Examples of capital controls include limits on foreign investment, restrictions on foreign currency transactions, and taxes on capital inflows.
b) Foreign exchange market interventions: Governments can intervene in the foreign exchange market by buying or selling their own currency to influence its value. If a government wants to prevent excessive currency appreciation, it can sell its own currency in the foreign exchange market, increasing the supply of the currency and thereby reducing its value.
c) Fiscal stimulus: Governments can implement fiscal policies, such as increased government spending or tax cuts, to stimulate domestic demand and economic activity. This can help counterbalance the impact of excessive currency appreciation, as increased domestic demand can support export-oriented industries and mitigate the negative effects of a stronger currency on exports.
By implementing these policies in combination, a government can aim to prevent or mitigate excessive currency appreciation, which can have adverse effects on a country's export competitiveness, trade balance, and overall economic stability.
