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    Question

    Consider the following effects on the foreign exchange rate and identify if they are true or false:

        I. An increase in U.S. demand for Indian goods increases the supply of dollars in the market, leading to a decrease in the dollar's exchange rate relative to the rupee.

        II. Higher interest rates in India compared to the U.S. will attract U.S. investments, increasing the supply of dollars and depreciating the dollar.

        III. Capital outflows from India to other countries increase the supply of rupees and depreciate the rupee.

    A ITrue, IITrue, IIITrue Correct Answer Incorrect Answer
    B ITrue, IIFalse, IIITrue Correct Answer Incorrect Answer
    C IFalse, IITrue, IIIFalse Correct Answer Incorrect Answer
    D ITrue, IITrue, IIIFalse Correct Answer Incorrect Answer
    E IFalse, IIFalse, IIITrue Correct Answer Incorrect Answer

    Solution

        Statement I is True: Increased U.S. demand for Indian goods leads to more dollars being sold for rupees, increasing the supply of dollars, which decreases its value relative to the rupee.     Statement II is True: Higher interest rates in India attract U.S. investments, increasing the supply of dollars in India and causing the dollar to depreciate relative to the rupee.     Statement III is True: Capital outflows from India mean that Indian investors are converting rupees into foreign currencies, increasing the supply of rupees and leading to its depreciation.

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