The figure shows how the exchange rate is set under a flexible system. The axes and curves are marked K, L, M and N.
Which of the following is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → K – Rupees per dollar; L – Quantity of dollars; M – Demand for dollars; N – Supply of dollars
The exchange rate is a price, so it goes on the vertical axis: K is rupees per dollar. The horizontal axis L shows the quantity of dollars.
M slopes down: a higher price of the dollar lowers the demand for it. N slopes up: a higher price raises the supply. So M is demand and N is supply.
NCERT (2026-27): “Flexible Exchange Rate This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate. As depicted in Fig. 6.1, the exchange rate is determined where the demand curve intersects with the supply curve, i.e., at point e on the Y – axis. Point q on the x – axis determines the quantity of US Dollars that have been demanded and supplied on e exchange rate. …”
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