ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As the price of a foreign currency increases, the quantity supplied of that currency increases. Exchange rates are determined just like other prices: by the interaction of supply and demand. At the equilibrium exchange rate, the supply and demand for a currency are equal.

Detailed explanation-2: -A floating rate is determined by the open market through supply and demand on global currency markets. Therefore, if the demand for the currency is high, the value will increase. If demand is low, this will drive that currency price lower.

Detailed explanation-3: -Ans. With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise in exchange rate implies depreciation in domestic currency. It encourages exports from a country.

Detailed explanation-4: -Three sources of demand or outflow of foreign exchange are: 1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only. 2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.