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How do capital movements affect the exchange rates?

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Question

How do capital movements affect the exchange rates?

Short Answer
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Solution

Capital movements affect exchange rates by changing the demand and supply of foreign currency.

  • Capital inflows (money coming into the country) increase the supply of foreign currency, causing the domestic currency to appreciate.

  • Capital outflows (money leaving the country) increase demand for foreign currency, causing the domestic currency to depreciate.

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Chapter 15: Balance of Payments and Exchange Rate - TEST YOURSELF QUESTIONS [Page 298]

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Frank Economics [English] Class 12 ISC
Chapter 15 Balance of Payments and Exchange Rate
TEST YOURSELF QUESTIONS | Q 1. | Page 298
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