IB International Economics Higher Level (HL) Practice Exam

Question: 1 / 400

How does speculation affect demand for a currency?

It decreases demand for stable currencies

It drives demand for currency expected to appreciate

Speculation plays a significant role in the foreign exchange market and influences currency demand based on traders' expectations about future currency values. When speculators believe that a currency is likely to appreciate in the future, they will actively buy that currency in anticipation of making a profit from the expected increase in value.

This behavior directly drives up the demand for the currency, as more market participants seek to acquire it before its value rises. The increased demand not only reflects the immediate interest in the currency but can also contribute to the actual appreciation due to increased buying pressure.

In contrast, if traders believe a currency will depreciate, they may sell it off, leading to decreased demand. Thus, the speculation on currency movements significantly impacts demand, making the notion that it drives demand for currency expected to appreciate the most accurate.

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It has no effect on demand

It stabilizes the current demand level

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