Which statement about exchange rate policies is true?

Exchange rate policies play a critical role in a country's economy by influencing how its currency is valued against others. The correct statement regarding exchange rate policies is that they can decrease the supply or demand for a currency.

When a government or central bank implements exchange rate policies, such as interventions in the foreign exchange market, it can directly affect the availability of a currency. For instance, if a central bank decides to buy its own currency, it reduces the supply of that currency in the market, which could lead to an appreciation of its value. Conversely, if it sells currency into the market, the supply increases, potentially leading to depreciation.

Additionally, these policies can influence demand as well. For example, if a country lowers interest rates, it could reduce foreign investment, decreasing demand for its currency since investors would exchange their money into that currency less frequently. Thus, the interaction of supply and demand as influenced by these policies directly links to the currency's value and performance in the foreign exchange market.

This understanding highlights the significance of exchange rate policies in managing a currency's stability and impact on international trade, investment, and economic stability.