Exchange rates can indicate economic health by:

• A. reflecting changes in a country's trade balance and investor confidence
• B. setting the official interest rate for the central bank
• C. controlling the amount of money in circulation directly
• D. determining the level of government spending

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the role of exchange rates in an economy. Exchange rates represent the value of one country's currency relative to another's and are influenced by various economic factors.
2. Step 2: Recognize that exchange rates do not directly set official interest rates or control money supply. These are typically managed by a country's central bank through monetary policy tools.
3. Step 3: Identify that exchange rates can reflect changes in a country's trade balance because fluctuations in currency value affect exports and imports, influencing the trade surplus or deficit.
4. Step 4: Understand that exchange rates also reflect investor confidence, as foreign investors' demand for a country's currency depends on their perception of economic stability and growth prospects.
5. Step 5: Conclude that among the options, exchange rates best indicate economic health by reflecting changes in trade balance and investor confidence, rather than by setting interest rates, controlling money supply, or determining government spending.