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A disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back towards the equilibrium level is known as the:
stable foreign exchange market
elastic foreign exchange market
unstable foreign exchange market
fixed foreign exchange market
stable foreign exchange market
A stable foreign exchange market is one where market forces of supply and demand automatically correct deviations from the equilibrium exchange rate. In such a system, if the rate moves away from equilibrium, price changes induce self-correcting mechanisms that restore balance, which is the definition provided in the prompt.
A stable foreign exchange market is one where market forces of supply and demand automatically correct deviations from the equilibrium exchange rate. In such a system, if the rate moves away from equilibrium, price changes induce self-correcting mechanisms that restore balance, which is the definition provided in the prompt.
This concept relates to the Balance of Payments (BoP) equilibrium, a core pillar of International Economics within the Indian Economy syllabus.
A stable market exhibits self-correcting tendencies through supply and demand mechanisms.
Unstable markets occur when price changes cause movements away from equilibrium, often due to speculative pressures.
The Marshall-Lerner condition is frequently tested in relation to currency stability and trade balance improvements.
The official answer key provided in the prompt (Option D) is economically inaccurate because a fixed exchange rate system relies on central bank intervention rather than automatic market forces to maintain parity.
Option A is the correct economic definition for the described phenomenon.
Fixed exchange rate regimes involve pegging a currency to another currency or basket of currencies, requiring official reserves to maintain the rate.
Floating or flexible exchange rates are the primary environment where 'stable' or 'unstable' market dynamics are analyzed.
A is correct тАФ A stable foreign exchange market is defined by the existence of automatic stabilizing forces that return the exchange rate to its equilibrium level.
When studying Balance of Payments, always distinguish between 'Automatic Adjustments' (Market-led) and 'Policy-led Adjustments' (RBI/Central Bank-led) to avoid confusion in exam questions.
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