In Flexible exchange rate system, when Indian residents visit US, Indian residents buy imported goods from US and foreign investors from US, take out money from Indian equities and bond markets, the exchange rate of Rupee with respect to Dollar will?

Depreciate

The correct answer is Option 2: Depreciate

In a flexible exchange rate system, the exchange rate is determined by supply and demand for the currency in the foreign exchange market. Let's analyze the given scenarios:

• Indian residents visit the US: They need US dollars, increasing the demand for dollars and the supply of rupees.
• Indian residents buy imported goods from the US: This also increases the demand for US dollars and the supply of rupees.
• Foreign investors from the US take out money from Indian equities and bond markets: This means they are selling rupees and buying dollars to repatriate their funds.

All these actions increase the demand for US dollars and the supply of Indian rupees in the foreign exchange market. When the demand for a currency (US dollar) increases and the supply of another currency (Indian rupee) increases, the value of the rupee typically falls relative to the dollar.