Which of the following is the source of demand for foreign exchange?

Imports from other countries

The correct answer is Option 2: Imports from other countries

The source of demand for foreign exchange comes from activities that require the domestic country to obtain foreign currency. This typically happens when there is an outflow of currency to pay for foreign goods, services, or assets.

Importers are required to purchase foreign exchange so that they can pay for the imports in the currency of the country from which they have brought the commodities.

The other options are related to the supply of foreign exchange or are incorrect in this context:

• Direct purchases of goods and services by non-residents in the domestic market: This would bring foreign exchange into the domestic market, increasing the supply.
• Purchase of shares by foreigners from domestic companies: This also brings foreign exchange into the domestic market, increasing the supply.
• Exports from the home country: Exports bring foreign exchange into the domestic market, increasing the supply.