Question

State any two factors that explain expansion of demand for a foreign currency in response to a fall in its price (in terms of the domestic currency).

Answer 1

(i) When foreign currency (say US$) becomes cheaper (in relation to the domestic currency), we get more dollars per unit of our currency. Accordingly, imports become lucrative. This raises the demand for foreign currency.

(ii) When foreign currency becomes cheaper and purchasing power of domestic currency increases in the international money market, domestic investors will be induced to make greater investments in the rest of the world. Accordingly, demand for foreign currency rises.