CA Foundation · Business Economics · International Trade
Under a flexible (floating) exchange rate system, a sudden increase in foreign demand for Indian software services will, other things equal, tend to:
The rupee will tend to appreciate. Higher foreign demand for Indian software services raises demand for rupees in the foreign exchange market, and under a floating rate system the price of the rupee rises, meaning it appreciates against foreign currencies.
- ADepreciate the rupee because more foreign currency is supplied
- BAppreciate the rupee because demand for rupees risesCorrect
- CLeave the rupee unchanged because the central bank fixes the rate
- DAppreciate the dollar against the rupee
Explanation
Foreign buyers need rupees to pay for Indian services, so demand for rupees increases. With a floating rate, this pushes up the rupee's value, which is an appreciation. The dollar correspondingly becomes cheaper in rupee terms, so the last option is wrong.
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