Read the following statements:
Statement I: If people expect the British pound to appreciate against the rupee, their demand for pounds falls in the present.
Statement II: Exchange rates also get affected when people hold foreign exchange expecting to gain from the appreciation of that currency.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Statement I is false but Statement II is true.
Statement I: If people expect the British pound to appreciate against the rupee, their demand for pounds falls in the present. — False. People who expect the pound to gain value want to hold pounds now, so demand for pounds rises.
Statement II: Exchange rates also get affected when people hold foreign exchange expecting to gain from the appreciation of that currency. — True. This is speculation: money is an asset, and expected gains change demand for a currency today.
NCERT (2026-27): “Speculation Money in any country is an asset. If Indians believe that British pound is going to increase in value relative to the rupee, they will want to hold pounds. Thus exchange rates also get affected when people hold foreign exchange on the expectation that they can make gains from the appreciation of the currency. This expectation in turn can actually affect the exchange rate in the following way. If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of Rs. 5,000. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.” |