When the price of a foreign currency falls, the demand for that foreign currency rises. Explain why?
Foreign exchange rate has ah inverse relationship with the demand for foreign currency. With a fall in the price of foreign exchange, value of domestic currency increases and that of foreign currency falls. It implies that foreign goods become cheaper and their domestic demand increases. ,
The rising domestic demand for foreign goods implies higher demand for foreign exchange which increases from OD_1 to OD_2, when exchange rate falls from OR_1 to OR_2, as shown in the figure.
