Identify the statements that will lead to an increase in demand for foreign exchange in the home country.
A. Increase in exports by home country
B. Increase in imports by home country
C. Increase in purchase of financial assets abroad by the residents of home country.
D. People of home country want to send gifts abroad
E. Foreigners send gifts to people of the home country
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 3
The correct answer is option (3) : B, C and D only
Let's break down why these statements lead to an increase in demand for foreign exchange:
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B. Increase in imports by home country: When imports increase, more foreign currency is needed to pay for these imports, thus increasing the demand for foreign exchange.
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C. Increase in purchase of financial assets abroad by residents of the home country: When residents of the home country buy financial assets abroad (such as stocks, bonds, or real estate), they typically need to convert their home currency into foreign currency to make these purchases, increasing the demand for foreign exchange.
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D. People of the home country want to send gifts abroad: Sending gifts abroad often requires converting home currency into foreign currency to pay for shipping or to purchase goods in another country, increasing the demand for foreign exchange.
The other statements:
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A. Increase in exports by home country: This would typically increase the supply of foreign exchange (as foreign buyers pay in their own currency), not increase the demand for foreign exchange.
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E. Foreigners send gifts to people of the home country: This involves foreigners needing to convert their currency into the home country's currency, thus increasing the supply of foreign exchange, not the demand.