Bachelor of General Studies (BGS) Degree Practice Exam

What type of policies affect the value and supply of a nation's currency?

1. Monetary policies

2. Fiscal policies

3. Trade policies

4. Regulatory policies

The correct answer is: Monetary policies

Monetary policies directly affect the value and supply of a nation's currency because they involve the management of interest rates and the total supply of money in circulation. Central banks implement these policies to control inflation, stabilize the currency, and foster economic growth. For example, lowering interest rates can increase money supply and encourage borrowing and spending, which might lead to depreciation of the currency. Conversely, raising interest rates can reduce the money supply, making the currency more attractive to foreign investors and potentially increasing its value. Fiscal policies, while important for overall economic health, primarily relate to government spending and taxation decisions. These can indirectly influence currency value by impacting economic growth and inflation, but they do not directly manage the currency supply. Trade policies pertain to the regulations and agreements that a country uses to manage its international trade relationships. While they can influence the economy and potentially the strength of a currency, they do not control currency supply or monetary value directly. Regulatory policies are concerned with the frameworks set by the government to control various sectors of the economy but are not directly related to currency value or supply. Overall, it is through monetary policies that the central bank exerts the most significant and immediate influence on currency value and supply.