12th Class Economics Solved Paper - Economics 2014 Delhi Set-III

  • question_answer
    How does giving incentives for exports influence foreign exchange rate? Explain.


    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,
    With the rise in exports the supply of foreign currency increases. In the diagram DD and SS are the initial demand curve and supply curve for foreign currency respectively. E is the initial equilibrium point, with OR as the equilibrium exchange rate. Rise in the supply of foreign currency would shift the supply curve from SS to S?S?. With the shift in supply curve, the new equilibrium is established at point E?, where the exchange rate falls from OR to OR\[_{1}\] and the demand and supply of foreign currency rises to\[O{{Q}_{2}}\]. This represents a case of currency appreciation.

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