Chapter 6 Part 1 - Foreign Exchange Rates

Economics Class 12
Macroeconomics

Foreign Exchange flows into home country because of

1. Export of Goods and Services
2. Receiving gifts/unilateral transfers from outside country
3. Investment Made in India by Foreigners
4. Tourism in Domestic Country (People visiting India have to sell their foreign currency)
5. Speculation (People sell foreign currency if they expect its value to go down)

## Relation between Foreign Exchange Rate and Foreign Exchange Supply

Supply for Foreign Exchange is directly proportional to Rate of Foreign Exchange

If Rate of Foreign Exchange Rises

It leads to Increase in Supply of Foreign Exchange

If Rate of Foreign Exchange Decreases

It leads to Decrease in Supply of Foreign Exchange

## What causes change in Exchange Rate?

Exchange Rate changes because of

Changes in Foreign Exchange Demand and Supply

If Demand Increases            Foreign Exchange Rate Increases

If Demand Decreases          Foreign Exchange Rate Decreases

If Supply Increases               Foreign Exchange Rate Increases

If Supply Decreases             Foreign Exchange Rate Decreases

#### Note

This is the case in flexible or floating exchange rate

### NCERT Questions

No questions in this part

### Other Books

#### Question 1

In the following questions, select the correct answers:

Which of the following items raises supply of foreign exchange?

1. Export of goods to China
2. Indian Student going to USA for MBA
3. Donation of \$50 million received from Microsoft
4. Purchase of land in England

#### Question 2

Supply curve of foreign exchange:

1. Horizontal straight line parallel to X-axis
2. Vertical straight line parallel to Y-axis
3. Slopes upwards
4. Slopes downwards

### Oswaal Questions

#### Question 1

Assertion (A): Export of goods and services from India to US would mean outflow of foreign exchange from India.

Reason (R): Foreign exchange in terms of receipts for exports flows from US to India.

Mark the correct choice:

1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
3. Assertion (A) is true, but Reason (R) is false.
4. Assertion (A) is false, but Reason (R) is true.

### Transcript

Relation between Foreign Exchange Rate & SupplyTour to India Cost Rs 140000 Year 2021 Suppose Exchange Rate is Rs70 What is Cost of Tour in Dollars Cost = 140000/70 =\$2000 Year 2025 Suppose Exchange Rate increases to Rs 100. What is Cost of Car in Rupees? Cost = 140000/100 = \$1400 Price is more Less Tour sold Less Demand of Foreign Exchange Price is less More Tour sold More Demand of Foreign Exchange When Exchange Rate increases Supply of Foreign Exchange Increases Schedule Representation - Foreign Exchange Rate and Foreign Exchange SupplyForeign Exchange Rate 70 80 90 Foreign Exchange Demand 500 600 700 Increase in Foreign Exchange Rate Leads to Increase in Foreign Exchange Supply Hence, Foreign Exchange Rate and Supply are directly proportional Graph Representation Foreign Exchange Rate and Supply Foreign Exchange Supply On X Axis, we show Foreign Exchange Rate On Y Axis, we show Foreign Exchange Supply As the Rate increases, Supply also Increases Hence, Supply Curve has Upward Slope