CHAPTER 11: FOREIGN EXCHANGE

RATE
CURRENCY DEPRECIATION CURRENCY APPRECIATION
1$ = Rs.77 1$ = Rs.79
1$ = Rs.79 1$ = Rs.77
Domestic currency I.e., Rupee has been Domestic currency I.e., Rupee has been
depreciated. appreciated.
EXPORT: Increases EXPORT: Decreases
IMPORT: Decreases IMPORT: Increases
NATIONAL INCOME: Increases NATIONAL INCOME: Decreases

People demand foreign currency to make payment in foreign currency.

When foreign exchange is demanded:

1. When import increases: (In case of CURRENCY APPRECIATION)to make payment for import of
goods & services more foreign currency is demanded.
2. Tourism: to make payment for foreign tour foreign currency is demanded.
3. Unilateral transfer sent abroad: to send gift or financial help to abroad foreign currency is
demanded.
4. Purchase of Assets in foreign countries: Purchase of assets like: land, shares, bonds etc.
foreign currency is demanded.
5. Speculation: During currency appreciation people buy more foreign currency which increase
its demand in hope of getting advantage in future from Currency depreciation.
Ex: if price of 1$ reduces from Rs.79 to Rs.77 people will buy more $ in hope
when say for example: 1$ rises from Rs.77 to Rs.80 than;
people can make gain by selling previously purchased dollars.
6. Repayment of international loans: foreign currency is need to payoff foreign loans.

When supply of foreign exchange increase:

1. Export of good & services: (In case of currency depreciation) when export increase supply of
foreign currency increases.
2. Foreign investment: (In case of currency depreciation) when foreigners invest more in home
country, supply of foreign currency increases.
3. Unilateral transfer from abroad: when gift or financial help received from abroad increases
supply of foreign currency increases.
4. Speculation: During Currency depreciation people who has purchased foreign currency
earlier during currency appreciation now sells foreign currency for making gain which
increase supply of foreign currency.
5. Loans from Rest of the world: Borrowings from foreign countries increase the supply of
foreign currency.
6. Grants and donation received from abroad also increase the supply of foreign currency.

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TEN COMMERCE COACHING CLASS
AKANCHHA AGRAWAL
 CHAPTER 11: FOREIGN EXCHANGE
RATE
When foreign exchange rate is not at equilibrium:

In case of currency depreciation: (when exchange rate rises)

i.e.; When exchange rate rises from R to R2:

Demand for foreign exchange will fall and supply will increase which leads to Excess supply. As, a
result exchange rate will fall till it again reaches the equilibrium.

In case of currency appreciation: (when exchange rate falls)

i.e.; When exchange rate falls from R to R1:

Demand for foreign exchange will rise and supply will fall which leads to Excess demand. As, a result
exchange rate will increase till it again reaches the equilibrium.

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TEN COMMERCE COACHING CLASS
AKANCHHA AGRAWAL
 CHAPTER 11: FOREIGN EXCHANGE
RATE

Changes in exchange rate:

Change in demand:

1. Increases in demand: (demand curve shifts from DD to D1D1)

When demand increases demand curve for foreign exchange will shift towards right and
excess demand will create in the economy.
As a result;
Exchange rate will rise i.e., domestic currency will depreciate.

2. Decrease in demand: (demand curve shifts from DD to D2D2)

When demand decreases demand curve for foreign exchange will shift towards left and
deficit demand will create in the economy.
As a result;
Exchange rate will fall i.e.; domestic currency will appreciate.

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TEN COMMERCE COACHING CLASS
AKANCHHA AGRAWAL
 CHAPTER 11: FOREIGN EXCHANGE
RATE

Change in supply:

1. Increase in supply: (supply curve shifts from SS to S1S1)

When supply increases supply curve for foreign exchange will shift towards right and excess
supply will create in the economy.
As a result;
Exchange rate will fall i.e.; domestic currency will appreciate.

2. Decrease in supply: (supply curve shifts from SS to S2S2)

When supply decreases supply curve for foreign exchange will shift towards left and deficit
supply will create in the economy.
As a result;
Exchange rate will rise i.e.; domestic currency will depreciate.

Ex: 1$ = Rs.77
1$ = Rs.79 OPPOSITE EFFECT:
Terms can be used for home currency Terms can be used for foreign currency
depreciation: appreciation:

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TEN COMMERCE COACHING CLASS
AKANCHHA AGRAWAL
 CHAPTER 11: FOREIGN EXCHANGE
RATE
Domestic or home currency has depreciated.
There is a fall in the price of domestic currency.
Domestic currency has become less valuable.
Exchange rate of domestic currency falls.
There is a decrease in exchange rate of home
currency.
Exchange rate of domestic currency has
become weaker.
Ex: 1$ = Rs.79
1$ = Rs.77
OPPOSITE EFFECT:
Terms can be used for home currency
appreciation:
Domestic or home currency has appreciated.
There is a rise in the price of domestic currency.
Domestic currency has become more valuable.
Exchange rate of domestic currency rises.
There is an increase in exchange rate of home
currency.
Exchange rate of domestic currency has
become stronger.
Foreign currency has appreciated.
There is a rise in the price of foreign currency.
Foreign currency has become more valuable.
Exchange rate of foreign currency rises.
There is an increase in exchange rate of foreign
currency.
Exchange rate of foreign currency has become
stronger.
Terms can be used for foreign currency
depreciation:
Foreign currency has depreciated.
There is a fall in the price of foreign currency.
Foreign currency has become less valuable.
Exchange rate of foreign currency falls.
There is a decrease in exchange rate of foreign
currency.
Exchange rate of foreign currency has become
weaker.
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TEN COMMERCE COACHING CLASS
AKANCHHA AGRAWAL