Question

Other things remaining constant, a rise in the price of foreign exchange may increase the supply of foreign exchange because it:

Options

• Makes imports cheaper for domestic residents

• Reduces the level of domestic savings

• Makes domestic goods cheaper for foreigners, encouraging exports

• Decreases the volume of exports

Answer 1

A rise in the price of foreign exchange makes domestic goods cheaper for foreigners, which encourages exports. Higher exports mean more foreign currency flows into the country, so the supply of foreign exchange may increase, other things remaining constant.