Exchange rates can indicate economic health by

Exchange rates can indicate economic health by

A. showing exactly how much of each nation’s currency is liquid.

B. revealing how much of each nation’s income goes to savings.

C. showing the relative strength of different nations’ currencies.

D. examining spending patterns across nations and continents.

Answer – C. showing the relative strength of different nations’ currencies.

Exchange rates are primarily considered to be the indicators based on relative strength of the currencies of various nations against each other. The exchange rates do not show liquidity, spending patterns directly and they are also not able to show the spending patterns or the savings rates. However, these factors have an indirect influence on the exchange rates and primary role depicted by the exchange rates is based on reflecting the overall comparative value that is depicted by the currencies. The values of different currencies are hugely affected by the economic factors that include the inflation rates, current account deficit, public debt and the interest rates. The aspects overall economic performances and the political stability are also hugely influenced by the exchange rates. The reason behind rejection of the other options provided with this question is mainly based on the lack of the impact of exchange rates on these aspects. The first option which states that exchanges rates can show exactly how much of the currency of a nation is liquid cannot be considered as the correct answer as exchange rates do not depict this factor and it cannot be used for understanding liquidity levels of a nation’s wealth. The second option that states that exchange rates depict the amount of nation’s wealth that goes into the savings is also not the correct option as the savings rates of a nation cannot be understood effectively by examining the exchange rates. The last option which states that exchange rates can indicate the economic health-based analysis of the spending patterns of individuals across the continents and nations is also not correct as it is not able to depict the spending levels and patterns of the individuals.