Give two examples, explain why there is a rise in the demand for foreign currency when its price falls.

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Solution

(a) A fall in the price of foreign currency implies that foreign goods become cheaper in relation to domestic goods. Thus, there is a increase in demand for foreign goods implying higher demand for foreign exchange.
(b) When the price of foreign currency falls, tourists from the home country find it cheaper to visit abroad. Thus, demand for foreign currency rises.

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