CBSE 2025, Compartment, Set 1

Question

"A rise in price of foreign exchange leads to fall in demand for foreign exchange, other factors remaining constant."
Do you agree with the given statement? Give valid reasons in support of your answer.

Edvaya · Accepted Answer

The correct answer is Subjective. Yes, I completely agree with the statement. There exists a definitive inverse relationship between the price of foreign exchange and its demand, ceteris paribus. **Reason:** A rise in the price of foreign exchange means that the domestic currency has depreciated. Consequently, it now requires more units of domestic currency to purchase the same amount of foreign currency. This makes foreign goods, services, and assets relatively more expensive for domestic buyers. As importing goods and investing abroad becomes costlier, people will reduce their purchases from other countries. This naturally decreases the overall requirement and demand for foreign exchange in the economy.

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Economics > Introductory Macroeconomics > Foreign Exchange Rate

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