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When price of a foreign currency falls, the supply of that foreign currency also falls. Explain, why? |
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Answer» 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.40 it 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 and vice versa. |
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