Floating or flexible exchange rate is determined by the market forces of demand and supply. In a completely floating exchange rate system, the Central Bank do not interfere in the foreign exchange market. Demand for a foreign currency increases in cases of increased imports or international travels or higher investments in securities of other countries. This increase the exchange rate and depreciates the domestic currency. Depreciation has a positive price impact on exports which increases and negative impact on imports which decreases.

Which of the following can increase the demand for foreign currency?

Students going to study abroad

The correct option that can increase the demand for foreign currency is: Students going to study abroad

Explanation:

• Growing Exports: Growing exports typically increase the supply of the domestic currency in the foreign exchange market, not the demand for foreign currency.

• Incoming Tourists: When tourists visit a country, they exchange their foreign currency for the local currency, increasing the demand for the local currency, not the foreign currency.

• Students going to study abroad: Students going to study abroad need to exchange their domestic currency for the currency of the country they are studying in, increasing the demand for the foreign currency.

• Decreasing imports: Decreasing imports would generally reduce the demand for foreign currency because imports involve paying for goods and services in foreign currency.