Question

Explain the relation between foreign exchange rate & supply foreign exchange

Answer 1

Dear Student

Exchange rate is the ratio between two currencies . Suppose the exchange rate is 60 rupees = 1 dollar .
Suppose the exchange rate depreciate for India . So now ; 70 rupees = 1 dollar .
Now let us assume that a pencil used to cost 60 rupees in India before depreciation . So in USA people had to pay 1 dollar for the pencil .;

But after depreciation for the same 60 rupees pencil a person in USA has to pay :
$$\begin{gathered} 70rupees=1dollar \\ \Rightarrow 60rupees=\frac{1}{70}\times 60=\frac{6}{7}=0.857dollar\left(approx\right) \end{gathered}$$

So Indian goods become cheaper for USA . Hence supply of Indian goods in USA market rises because there is more demand . Supply of USA goods in Indian market falls because they become costly .
So when Indian currency depreciates supply of foreign goods fall in domestic market and vive versa in case of appreciation .

Regards .