Question

Why does the demand for foreign currency fall and supply rise when its price rises? Explain.

Answer 1

The demand for foreign currency fall and supply rises when its price rises because domestic goods become cheaper. It induces the foreign currency to increase their imports from the domestic country. Hence, a supply of foreign currency rises. For example, if the price of the 1US dollar rises from Rs 53 to Rs 59, it implies that exports to the US will increase as Indian goods will become relatively cheaper. It will raise the supply of US dollars.