Under a flexible exchange rate, three of the following shift the demand curve for foreign exchange in India to the right. Which is the odd one out?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → A rise in income abroad
The demand for foreign exchange comes from Indians who must pay foreigners. The supply comes from foreigners who pay India.
Option (1) A rise in India’s demand for imported goods — True. Importers need more foreign exchange.
Option (2) A rise in income abroad — False. Foreigners buy more of our goods, so exports rise and the supply curve of foreign exchange shifts outward.
Option (3) More travel abroad by Indians — True. Travellers must pay for foreign services in foreign currency.
Option (4) A rise in income in India — True. Higher income raises spending on imports.
NCERT (2026-27): “Income and the Exchange Rate When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. …” “Flexible Exchange Rate … Suppose the demand for foreign goods and services increases (for example, due to increased international travelling by Indians), then as depicted in Fig. 6.2, the demand curve shifts upward and right to the original demand curve. …” |