Question:
[Graph context: Demand and Supply of SL Rupees in the market for Yen]. What could be the new equilibrium point after an increase in demand for imported cars owing to a substantial reduction in duty on imported cars in Sri Lanka?
(1) A
(2) B
(3) C
(4) D
(5) E
Correct Answer:
(4)
Answer Explanation:
When Sri Lankans buy more Japanese cars, they must supply their Sri Lankan Rupees to the foreign exchange market to demand Japanese Yen. This causes the Supply curve of Sri Lankan Rupees to shift to the right (downward). The new equilibrium point (represented by ‘D’ in the standard graph) results in a depreciated value of the Rupee.
Topic: Exchange Rates Year: 2018
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