© examsnet.com
Question : 3
Total: 5
How does giving incentives for exports influende foreign exchange rate? Explain.
Solution:
The incentives for exports boosts exports for the country. As a result of increase in exports the supply of foreign currency in the country increases. With demand remaining the same this results in a fall in the exchange rate implying currency appreciation. This can be explained diagrammatically as follows,D D and S S are the initial demand curve and supply curve for foreign currency respectively. E is the initial equilibrium point, with O R as the equilibrium exchange rate. Rise in the supply of foreign currency would shift the supply curve from S S to S'S'. With the shift in supply curve, the new equilibrium is established at point E ′ , where the exchange rate falls from O R to O R 1 and the demand and supply of foreign currency rises to O Q 2 . This represents a case of currency appreciation.
With the rise in exports the supply of foreign currency increases. In the diagram
© examsnet.com
Go to Question: