Official Answer Key & Detailed Solution
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Correct Answer: Option (B) — 2 and 3 are correct
Concept & Option Breakdown
Standard Reference VerifiedStatement 2 is correct: Demand for a nation's exports generates direct demand for its domestic currency in foreign exchange markets.
Statement 3 is correct: Political stability and sovereign credibility instill investor confidence, directly affecting capital flows and currency exchange rates.
Statements 1 and 4 are incorrect: The World Bank does not fix currency exchange rates. While economic potential affects long-term fundamental trends, short-to-medium term currency pricing is determined by market demand-supply dynamics, capital flows, and macroeconomic stability.
Eliminate options containing 1: The World Bank is a development financing body and does not determine market currency prices.
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