Which of the following will not lead to flow of foreign currency into the home country?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → People want to purchase goods and services from other countries.
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Exports by a country lead to the purchase of its domestic goods and services by the foreigners. (Leads to Inflow): Foreigners pay for these goods/services using their currency, which then flows into the home country.
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People want to purchase goods and services from other countries. (Leads to Outflow): Domestic residents must convert their home currency into foreign currency to pay for imports. This causes the outflow of the domestic currency (and a demand for the foreign currency).
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Foreigners send gifts or make transfers. (Leads to Inflow): This is a unilateral transfer where the foreign currency is sent to the home country.
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The assets of a home country are bought by the foreigners. (Leads to Inflow): Foreigners must first convert their currency to the home country's currency to buy assets (like stocks, bonds, or property), causing foreign currency to flow in.