(A) Why Does a "Demand for Foreign Exchange" Exist by a Country's

Question

Examlex · Accepted Answer

The Answer is (a) The demand for foreign exchange exists because a country's economic actors, such as businesses, individuals, and the government, need foreign currency to conduct international trade, investment, and travel. This demand curve has a downward slope because as the exchange rate of the domestic currency relative to the foreign currency decreases, the quantity demanded of foreign exchange increases. This is because a lower exchange rate makes foreign goods and services cheaper for domestic consumers and businesses, leading to an increase in demand for foreign currency.

(b) The supply of foreign exchange to a country arises from economic actions such as exporting goods and services, receiving foreign investment, and earning income from foreign assets. When domestic producers sell their goods and services to foreign buyers, they are paid in foreign currency, which adds to the supply of foreign exchange. Similarly, when foreign investors bring capital into the country or when domestic entities earn income from foreign investments, it adds to the supply of foreign exchange. We cannot be sure that the supply curve will always have an upward slope because factors such as changes in government policies, international trade agreements, and global economic conditions can affect the supply of foreign exchange.

(c) When we put the demand curve and supply curve of foreign exchange together, the equilibrium exchange rate is determined at the point where the quantity of foreign exchange demanded equals the quantity supplied. If there were a sudden increase in the supply of foreign exchange to the country, the equilibrium exchange rate would decrease. This is because an increase in the supply of foreign exchange would lead to a surplus of foreign currency in the market, causing the value of the domestic currency to depreciate relative to the foreign currency. As a result, the equilibrium exchange rate would change to reflect the new balance between the demand for and supply of foreign exchange.

(A) Why Does a "Demand for Foreign Exchange" Exist by a Country's

Essay

Correct Answer:
Answered by ExamLex AI

(A) Why Does a "Demand for Foreign Exchange" Exist by a Country's

Essay

Correct Answer:Answered by ExamLex AIShow Answer

Correct Answer:
Answered by ExamLex AI