Answer: Use foreign currency reserves to buy its own currency

## Explanation The correct action is **C. Use foreign currency reserves to buy its own currency**. **Why This is the Correct Action:** 1. **Addresses Currency Depreciation**: Buying the local currency with foreign reserves increases demand for the local currency, which can help stabilize or appreciate its value against the speculative short selling. 2. **Supports Banks' Foreign Debt**: By strengthening the local currency, the government makes it easier for domestic banks to service their foreign currency-denominated debt, as each unit of local currency can buy more foreign currency. 3. **Demonstrates Commitment**: Using reserves signals the government's commitment to defending the currency, which can deter further speculative attacks. **Why Other Options Are Incorrect:** - **A. Decrease interest rates**: This would likely worsen the situation by making the local currency less attractive to hold, potentially accelerating capital flight and further depreciation. - **B. Sell its currency in foreign exchange markets**: This would increase the supply of local currency in the market, causing further depreciation and exacerbating the crisis. **Key Insight**: In a currency crisis scenario, the government needs to support its currency's value, and using foreign reserves to buy local currency is a standard intervention strategy.

Author: LeetQuiz Editorial Team