Other things remaining constant, a rise in the price of foreign exchange increases India’s exports. Whether the supply of foreign exchange actually increases depends particularly on:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → the elasticity of demand for exports and imports
A dearer dollar makes Indian goods cheaper for foreigners. Exports rise, but the supply of foreign exchange may or may not rise. Whether it actually rises depends on several factors, particularly the elasticity of demand for exports and imports.
If foreign demand responds weakly, more goods are sold at a lower dollar price and the dollars earned may not go up.
NCERT (2026-27): “Supply of Foreign Exchange … A rise in price of foreign exchange will reduce the foreigner’s cost (in terms of USD) while purchasing products from India, other things remaining constant. This increases India’s exports and hence supply for foreign exchange may increase (whether it actually increases depends on a number of factors, particularly elasticity of demand for exports and imports.” |