Q27 of 38 Page 1

Why does the demand for foreign currency fall and supply rises when its price rises? Explain.

Foreign exchange rate has an inverse relationship with the demand for the foreign currency and direct relation with the supply of foreign currency.

When price of foreign exchange rises, value of domestic currency decreases, import becomes costlier and thus domestic demand for foreign goods fall. Due to the fall in imports, the demand for foreign currency will also fall.


When the price of a foreign currency falls, value of domestic currency increases, it leads to cheaper imports and exports, the exporters are discouraged due to costlier exports. Due to fall in exports, the supply of foreign currency will also fall.


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Explain how government budget can be used to influence distribution of income?

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An economy is in equilibrium. From the following data about an economy calculate autonomous consumption.

(a) Income = 5000


(b) Marginal propensity to save = 0.2


(c) Investment expenditure = 800

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Explain ‘non-monetary exchanges’ as a limitation of using gross domestic product as an index of welfare of a country.

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How will you treat the following while estimating domestic product of a country? Give reasons for your answer:

(a) Profits earned by branches of country’s bank in other countries


(b) Gifts given by an employer to his employees on Independence Day


(c) Purchase of goods by foreign tourists