When price of a foreign currency rises, its demand falls. Explain why.
When the price of foreign currency rises then it implies that foreign goods have become expensive for the domestic residents of the country. This results in a fall in the demand for foreign goods by the domestic residents. Consequently, the demand for foreign currency falls.
For example, suppose the rupee-dollar exchange rate (price of dollars in terms of rupees) rises from say, from $1= Rs 50 to $1= Rs52. This implies that in order to purchase one dollar worth of foreign goods, the domestic residents now have to pay Rs 52 instead of Rs 50. Thereby, the demand for foreign goods decreases. Consequently, the demand for dollars decreases.
Explain how 'distribution of gross domestic product' is a limitation in taking gross domestic product as an index of welfare.
Given that national income is Rs.80 crore and consumption expenditure Rs.64 crore, find out average propensity to save. When income rises to Rs.100 crore and consumption expenditure to Rs.78 crore, what will be the average propensity to consume and the marginal propensity to consume?
Explain the relationship between investment multiplier and marginal propensity to consume.
