Q. 275.0( 1 Vote )

Why does the dema

Answer :

Foreign exchange rate has an inverse relationship with the demand for the foreign currency and direct relation with the supply of foreign currency.

When price of foreign exchange rises, value of domestic currency decreases, import becomes costlier and thus domestic demand for foreign goods fall. Due to the fall in imports, the demand for foreign currency will also fall.

When the price of a foreign currency falls, value of domestic currency increases, it leads to cheaper imports and exports, the exporters are discouraged due to costlier exports. Due to fall in exports, the supply of foreign currency will also fall.

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