Question
When exchange rate of foreign currency rises, its supply rises. How? Explain.
Solution
Reasons for rise in demand for foreign currency when its price falls are: (i) Wien price of foreign currency falls, imports from that country become cheaper. For example, suppose price (exchange rate) of one US dollar falls say from र 50 to र 45, it means less rupees are required to buy one dollar worth of goods from US. So imports increase and hence demand for foreign currency rises, (ii) When foreign currency becomes cheaper in terms of domestic currency, it promotes tourism to foreign country. So this also raises demand for foreign currency.
In short, lower the price of US dollar, higher is the demand for US dollar and vice versa.
