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in Economics by (79.8k points)

When exchange rate of a foreign currency rises, its supply also rises. How?

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The supply of foreign currency rises in the following situations: 

1. When price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign country to increase their imports from the domestic country. As a result, supply of foreign currency rises. 

For example, if price of 1 US dollar rises from Rs 60 to Rs 65, then exports to USA will increase as Indian goods will become relatively cheaper. It will raise the supply of US dollars. 

2. When price of a foreign currency rises,foreign direct investment (FDI) from rest of the world increases, which will increase the supply for foreign exchange. 

3. When price of a foreign currency rises, also supply of foreign currency rises as people want to make gains from speculative activities.

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