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Foreign Exchange flows into home country because of
- Export of Goods and Services
- Receiving gifts/unilateral transfers from outside country
- Investment Made in India by Foreigners
- Tourism in Domestic Country (People visiting India have to sell their foreign currency)
- 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?
- Export of goods to China
- Indian Student going to USA for MBA
- Donation of $50 million received from Microsoft
- Purchase of land in England
A. Export of goods to China
C. Donation of $50 million received from Microsoft
Explanation
Supply of foreign exchange increase because of following reasons:
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)
In this case, we have export of goods and Unilateral transfers from outside country.
Question 2
Supply curve of foreign exchange:
- Horizontal straight line parallel to X-axis
- Vertical straight line parallel to Y-axis
- Slopes upwards
- Slopes downwards
C. Slopes upwards
Explanation
On X Axis, we show Foreign Exchange Supply
On Y Axis, we show Foreign Exchange Rate
As the Rate increases, Supply also Increases
Hence, Supply Curve has Upward Slope
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:
- Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
- Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
- Assertion (A) is true, but Reason (R) is false.
- Assertion (A) is false, but Reason (R) is true.
D. Assertion (A) is false, but Reason (R) is true.
Explanation
Export of goods and services from India to US would mean inflow of foreign exchange to India.
