Question

When the demand for foreign exchange rises, with no change in its supply, then *

1.The domestic currency will depreciate against the foreign currency

2.The domestic currency will appreciate against the foreign currency

3.The foreign currency will depreciate against the domestic currency

4.The exchange rate will remain constant​

Answer 1

3.The foreign currency will depreciate against the domestic currency

Answer 2

Option 1 is the correct answer.

When the demand for foreign exchange rises, with no change in its supply, then the domestic currency will depreciate against the foreign currency.

1. There is an inverse relationship between demand for foreign exchange and foreign exchange rate.
2. Therefore, when demand for foreign exchange rises the foreign exchange rate falls that is the value of currency of domestic currency falls comparably against other countries.