1.

Explain that there is an inverse relationship between price of foreign currency and its demand.

Answer»

It is true that there is an inverse relationship between price of foreign currency and its demand. 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 will rise. This leads to increase in demand for foreign exchange. Similarly, if exchange rate rises, the demand for foreign exchange falls.



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