Why are foreign exchange rate and demand for foreign exchange inversely related ?
Answers
Explanation:
When foreign exchange rate rises, imports become costly for the domestic consumers. This reduces demand for imports causing fall in demands for foreign exchange (When foreign exchange rate falls, opposite happens. Import become cheaper and in turn raising demand for foreign exchange). (Explanation based on anyone rise or fall in foreign exchange rate, is sufficient to attract full credit.) Detailed Answer: When price of a foreign currency falls, its demand rises, owing to the following reasons: (i) Indian players in the international market will now buy more of foreign currency/ because now it is available at a lower price. Thus, the demand rises. (ii) Now, imports become cheaper than before. Accordingly, imports tend to rise implying a rise in the demand for foreign currency. (iii) Travelling abroad now becomes cheaper. Accordingly, demand for the foreign currency rises.Read more on Sarthaks.com - https://www.sarthaks.com/85536/why-are-foreign-exchange-rate-and-demand-for-foreign-exchange-inversely-related-explain
Answer:
Foreign exchange refers to the stock of foreign currency held by a country at a particular point of time.
Foreign exchange rate is the rate at which the currency of one country is traded for currency of another country. In other words, it refers to the cost of one currency in terms of another currency.
Demand for foreign currencies is inversely related with the exchange rate. In other words, higher the exchange rate, lower will be the demand for foreign currencies and vice-versa. A rise in the exchange rate (from say, $1= Rs 40 to $1= Rs 50) implies that the goods from abroad become more expensive (that is, it now cost Rs 50 to purchase a commodity worth $1 instead of Rs 40 earlier). This would result in a reduction in the demand for the foreign commodities. This fall in the demand for foreign goods reduces the demand for dollars and vice-versa