Question

If demand for foreign currency decreases, what happens to the exchange rate and domestic currency?

Options

• Exchange rate falls and domestic currency appreciates

• Exchange rate rises and domestic currency depreciates

• Exchange rate rises and domestic currency revalues

• Exchange rate is maintained by RBI buying foreign exchange

Answer 1

A decrease in demand for foreign currency causes the exchange rate to fall. As a result, the domestic currency appreciates under the Flexible system.