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Open Economy Macroeconomics — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsOpen Economy Macroeconomics4 Marks
Question
Explain two sources each of demand and supply of foreign exchange.
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Answer

Sources of demand for a foreign currency:
  1. For imports payment is to be made in foreign currency. So it is a source of its demand.
  2. For transfer payments to other country in the form of gifts or remittance, etc., foreign currency is needed.
  3. For making investments in other countries foreign currency is needed.
Sources of supply of a foreign currency:
  1. Payment for exports are received in foreign currency. So exports are a source of its supply.
  2. Factor income earned from abroad is a source of supply of foreign currency as it is received in foreign currency.
  3. Remittances from abroad are also in foreign currency. So it is also a source of supply of foreign currency.

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