Q.Read the following statements carefully : Statement 1 : The price of a given currency in terms of another is known as bank rate. Statement 2 : Demand curve for foreign exchange is a downward sloping curve. In the light of the given statements, choose the correct option from the following : (A) Statement 1 is true and Statement 2 is false. (B) Statement 1 is false and Statement 2 is true. (C) Both Statements 1 and 2 are true. (D) Both Statements 1 and 2 are false.

Statement 1 is incorrect. The price of a given currency in terms of another currency is known as the exchange rate. For example, if one US dollar equals ₹83, then ₹83 is the exchange rate for one US dollar. The bank rate, on the other hand, is the interest rate at which the central bank lends money to commercial banks. These are distinct concepts in economics. …

Let's break down each statement to understand the underlying economic concepts.

Understanding Statement 1: The price of a given currency in terms of another is known as bank rate.

The "price of a given currency in terms of another" refers to how much one currency is worth when exchanged for another. This fundamental concept in international economics is known as the exchange rate. For instance, if one US dollar can be exchanged for ₹83, then ₹83 is the exchange rate for one US dollar in Indian rupees. It tells us how many units of the domestic currency are needed to buy one unit of a foreign currency, or vice versa.

On the other hand, the bank rate is a monetary policy tool used by the central bank of a country (like the Reserve Bank of India). It is the interest rate at which the central bank lends money to commercial banks without demanding any collateral. It influences the overall interest rate structure in the economy and is distinct from the exchange rate.

Since the statement incorrectly equates the exchange rate with the bank rate, Statement 1 is false.

Understanding Statement 2: Demand curve for foreign exchange is a downward sloping curve.

The demand for foreign exchange arises from various international transactions. For example, when residents of a country want to:

• Import goods and services from abroad.
• Travel to foreign countries (tourism).
• Invest in foreign assets (e.g., buying foreign stocks or bonds).
• Send remittances to relatives living abroad.

All these activities require converting domestic currency into foreign currency, thus creating a demand for foreign exchange.

Now, let's consider the relationship between the exchange rate and the quantity demanded of foreign exchange. Suppose the exchange rate is expressed as the price of foreign currency in terms of domestic currency (e.g., rupees per US dollar).

• If the exchange rate falls (i.e., foreign currency becomes cheaper in terms of domestic currency), then:
  • Imports become cheaper for domestic consumers, leading to an increase in import demand.
  • Foreign travel becomes cheaper, encouraging more tourism abroad. …