UPSC Prelims 1998 · General Studies
Question 16: Economy and Social Development
Consider the following statements: The price of any currency in the international market is decided by the I. World Bank II. Demand for goods/services provided by the country concerned III. Stability of the government of the concerned country IV. Economic potential of the country in question Of these statements:
AnswerThe answer is (b).
Under a floating-rate system, a currency's price is set in the foreign-exchange market by demand and supply. Demand for a country's currency rises with demand for its goods and services and with investors' confidence, which depends on political stability. The World Bank does not fix exchange rates; fixing them was the IMF's role under the old par-value system. The key counts only II and III. Economic potential shapes long-run expectations but is not treated as a direct determinant.
- I. The World Bank lends for development; it does not decide currency prices.
- II. Demand for a country's goods and services creates demand for its currency.
- III. A stable government builds investor confidence, which supports the currency.
- IV. The key does not count economic potential as a direct determinant of the price.
Why each option is right or wrong
- (a) Includes I, the World Bank, which does not set currency prices, so not all four are correct.
- (b) Right: demand for the country's goods and services, and stability of its government, drive its currency's price.
- (c) Leaves out demand for goods and services, the main driver.
- (d) Includes the World Bank, which does not set currency prices, and leaves out II and III.
Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 1998, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.