Question
When exchange rate of foreign currency rises, its supply rises. How? Explain.
or
When price of foreign currency falls, supply of foreign currency also falls.
Solution
(i) A rise in foreign exchange rate makes home country's (say, India's) goods cheaper to foreigners. As a result demand for Indian goods increases leading to increase in India's exports. This brings a greater supply of foreign exchange, (ii) Again a rise in foreign exchange rate renders home country's currency cheaper which attracts foreigners and promotes tourism to home country (say, India). This also raises supply of foreign exchange.
