Economics Test - 23

Read the following case study and answer the question

The Central Bank of India i.e. Reserve Bank of India, is the apex institution that control the entire financial market. Its one of the major functions is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the foreign exchange rate. In other words, it is the central bank’s job to control a country’s economy through monetary policy; if the economy is moving slowly or going backward, there are steps that central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occur and currency will devalue. When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or infact don’t do, will affect the currency of that country. Sometimes, it is within the central bank’s interest to purposefully effect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country’s commodities will seek cheaper supply; hence directly effecting the economy.