Give the meaning of 'foreign exchange' and 'foreign exchange rate'. Giving reason, explain the relation between foreign exchange rate and demand for foreign exchange.
CBSE OUTSIDE DELHI - SET 1 2012
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Foreign exchange refers to any currency other than the domestic currency.
Foreign exchange rate is the rate at which one currency can be converted into another currency.
Suppose foreign exchange rate falls, it means that imports etc have become cheaper because people now have to pay less for imports.As a result demand for imports, etc. rises. This leads to increase in demand for foreign exchange. Similarly, if exchange rate rises, the demand for foreign exchange falls.
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