Assertion (A): Other things remaining constant, a rise in the price of foreign exchange reduces the demand for foreign exchange.
Reason (R): A rise in the price of foreign exchange reduces the cost (in USD) to foreigners of buying products from India.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Other things remaining constant, a rise in the price of foreign exchange reduces the demand for foreign exchange. — True. A dearer dollar makes foreign goods cost more in rupees, so we import less and need less foreign exchange.
Reason (R): A rise in the price of foreign exchange reduces the cost (in USD) to foreigners of buying products from India. — True. Each dollar now buys more rupees, so Indian goods are cheaper for foreigners.
Why R does not explain A?
R is about foreigners buying our goods. That raises our exports and so works on the supply of foreign exchange. A is about the demand for foreign exchange.
The real reason for A: a higher price of foreign exchange raises the rupee cost of imports. Imports fall, so the demand for foreign exchange falls.
NCERT (2026-27): “Demand for Foreign Exchange … A rise in price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign good. This reduces demand for imports and hence demand for foreign exchange also decreases, other things remaining constant.” “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 …” |