question_answer

Why does the demand for foreign currency fall and supply rises when its price rises? Explain.

Answer:

Demand for foreign currency, comes from the people who need it to make payment in foreign currency.

Supply of foreign currency comes from the people who receive it due to following reasons:

(a) Exports of goods and services

(b) Foreign Investment

(c) Speculations

Reasons for rise in supply:

(i) When price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign country to increase their imports from the domestic country. As a result, supply of foreign currency rises. For Eg., If price of U.S dollar rises from Rs. 45 to Rs. 50, then exports to USA will increase as Indian goods will become cheaper. It will raise the supply of U.S dollars.

(ii) When price of a foreign currency rises, supply of foreign currency rises as people want to make gains from speculative activities.