# NCERT Solutions Class 12 Economics Foreign Exchange Rate

## Foreign Exchange Rate Class 12 NCERT Solutions

Class 12 Economics students should refer to the following NCERT questions with answers for Foreign Exchange Rate in standard 12. These NCERT Solutions with answers for Grade 12 Economics will come in exams and help you to score good marks

### Foreign Exchange Rate NCERT Solutions Class 12

Foreign Exchange Rate

Question 1. How is exchange rate determined under a flexible exchange rate regime? [6 Marks]

Or

How is foreign exchange rate determined? Explain with diagram.

Or

How is exchange rate determined in a foreign exchange market? Explain.[AI 2013 (Set 1)]

Answer: 1. Exchange rate in a free exchange market is determined at a point, where demand for foreign exchange is equal to the supply of foreign exchange.

2. Let us assume that there are two countries – India and U.S.A – and the exchange rate of their currencies i.e., rupee and dollar is to be determined. Presently, there is floating or flexible exchange regime in both India and U.S.A. Therefore, the value of currency of each country in terms of the other currency depends upon the demand for and supply of their currencies.

3. In the above diagram, the price on the vertical axis is stated in terms of domestic currency (that is, how many rupees for one US dollar). The horizontal axis measures the quantity demanded or supplied.

4. In the above diagram, the demand curve [D\$] is downward sloping. This means that less foreign exchange is demanded as the exchange rate increases. This is due to the fact that the rise in price of foreign exchange increases the rupee cost of foreign goods, which make them more expensive. As a result, imports decline. Thus, the demand for foreign exchange also decreases.

The supply curve [S\$] is upward sloping which means that supply of foreign exchange increases as the exchange rate increases. This makes home country’s goods become cheaper to foreigners since rupee is depreciating in value. The demand for our exportsshould therefore increase as the exchange rate increases. The increased demand for our exports translates into greater supply of foreign exchange. Thus, the supply offoreign exchange increases as the exchange rate increases.

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