Question

Why is Foreign Exchange demanded?

Hint:

The demand curve for foreign exchange is downward sloping, meaning as the exchange rate falls (foreign currency gets cheaper), the demand for it increases.

Answer 1

Step 1: Understanding the Concept:
Individuals, firms, and the government need foreign currency to make payments to the rest of the world.
Step 2: Detailed Explanation:
Major reasons for demand for foreign exchange:
1. Imports: To pay for goods and services purchased from foreign countries.
2. Tourism: Citizens going abroad for holidays need the currency of that country for local expenses.
3. Unilateral Transfers: Sending gifts or financial help to people living in other countries.
4. Investment: To buy assets like shares, bonds, or real estate in foreign nations.
5. Speculation: Holding foreign currency to profit from future changes in the exchange rate.
Step 3: Final Answer:
Foreign exchange is demanded for imports, international travel, foreign investments, and financial transfers to other nations.