Question

  Although the mechanics of central bank interventions in the global currency markets may vary from country to country, the goal is always the same, to ____ the demand for one currency by ______ the supply of another.

a. increase, increasing

b. decrease, decreasing

c. increase, decreasing

d. decrease, increasing

Answer is a), need an explanation why increase the supply of another currency will increase the demand of home currency

Answer 1

Option a.

When the supply of domestic currency increases, the inflation increases and becomes less competitive and increase in supply reduces the interest rate hence the domestic currency depriciates, so the other way is true for the foreign currency too.

Hence the central bank intervenes to decrease the money supply of domestic currency, thus increasing the demand for domestic currency which reduces the demand for foreign currency, hence the supply of the foreign currency increases.