Class 12 Macro Economics Notes · CBSE

Demand and Supply of Foreign Exchange

Six sources of demand and supply of foreign exchange, demand and supply curves and their slopes, and reasons for shifts in demand and supply. CBSE Class 12 Macroeconomics notes.

Last updated: 1 Sep 2026

Notes

Reasons for Demand

Foreign exchange is required to pay for goods and services imported from other countries.

Reasons for Rise in Demand

Fall in Foreign Currency Price

When the price of foreign currency falls, imports become cheaper for domestic buyers. This encourages more imports, leading to a rise in demand for foreign exchange.

Demand Curve of Foreign Exchange

The demand curve for foreign exchange slopes downwards because there is an inverse relationship between the demand for foreign exchange and the foreign exchange rate.

Reasons for Supply

When a country exports goods and services, foreign buyers pay in foreign currency, increasing the supply of foreign exchange.

Reasons for Rise in Supply

Rise in Foreign Currency Price

When the foreign exchange rate rises, domestic goods become cheaper for foreigners. This encourages more exports, increasing the supply of foreign exchange.

Supply Curve of Foreign Exchange

The supply curve of foreign exchange slopes upwards due to a positive relationship between the supply of foreign exchange and the foreign exchange rate.