Question

Short Answer Type Questions:
What is meant by foreign exchange rate? Give three reasons why people desire to have foreign exchange.

Answer 1

Foreign exchange rate is the rate of domestic currency which can be exchanged for foreign currency. Some economists refer to it as the external value of the domestic currency.

Three sources of demand or outflow of foreign exchange are:

1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.

2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.

3)Direct purchase Abroad: Foreign exchange is needed to make direct purchases of goods and services from abroad.