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Give two sources each of demand & supply of foreign exchange. Giving reason explain the relation between foreign exchange rate and supply of foreign exchange. |
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Answer» Sources of demand of foreign exchange 1. To purchase goods and services from other countries i.e. import. 2. To send a gift abroad. Sources of supply of foreign exchange 1. Foreigners purchasing home countries goods and services through exports. 2.Direct foreign investment in the domestic country Relationship between foreign exchange rate and supply of foreign exchange. There is a direct relation between foreign exchange rate and supply of foreign exchange higher the exchange rate, higher the supply of foreign exchange and lower the exchange rate, lower the supply of foreign exchange. Suppose the price of US $ in India falls from Rs.50 to Rs.40it means earlier USA people could buy Rs.50 worth of good from India by giving one dollar. Now they can buy only Rs.40 worth of good from India. Indian goods become costlier for USA. Therefore USA buys less of Indian goods this reduces the supply of dollar to India. |
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