Identify, the factor which influences the demand for foreign exchange in a country.
(Choose the correct option)
Identify, the factor which influences the demand for foreign exchange in a country.
(Choose the correct option)
Show Hint
- Investments made by Indians in Japan
- Indian producers exporting fabrics to United States of America (USA)
- Remittances by Indian workers from Gulf countries
- An Indian software company providing services to clients abroad
The Correct Option is A
Solution and Explanation
People and firms need foreign currency when they must pay someone abroad. So any payment made to the rest of the world creates demand for foreign exchange.
Examples are imports, travel abroad, gifts sent abroad, loan repayments and investment made abroad.
Step 2: Test each option:
(A) Indians investing in Japan must pay in yen. They buy yen with rupees, so this raises demand for foreign exchange.
(B) Indian producers exporting fabrics to the USA receive dollars. This adds to the supply of foreign exchange.
(C) Remittances by Indian workers from Gulf countries bring foreign currency home. This is a supply factor.
(D) An Indian software firm serving clients abroad earns foreign currency. This also adds to supply.
Step 3: Pick the answer:
Only (A) involves a payment going out of India, so (A) is correct.
Final Answer:
Investment by Indians in Japan raises the demand for foreign exchange. Option (A).
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