"There exists a positive relation between foreign exchange rate and supply of foreign exchange." Do you agree with the given statement ? Justify your answer with valid arguments.

Question

Accepted Answer

Yes, I agree with the given statement. There exists a positive relationship between the foreign exchange rate and the supply of foreign exchange. When the foreign exchange rate rises (e.g., $1 rises from ₹81 to ₹82), domestic goods become relatively cheaper for foreign buyers. This encourages foreigners to increase imports from the domestic country, thereby raising the supply of foreign exchange. Additionally, speculators sell foreign currency when its price rises to realize profits, further increasing the supply. The supply curve of foreign exchange slopes upwards due to this positive relationship between the exchange rate and the quantity of foreign exchange supplied.