Which of the following statements regarding the market for foreign currency exchange is true ?
Correct answer: A. An increase in Pakistan's net capital outflow increase the supply of rupees and the rupees depreciate
- A. An increase in Pakistan's net capital outflow increase the supply of rupees and the rupees depreciate
- B. An increase in Pakistan's net capital outflow increase the demand of rupees and the rupees appreciate
- C. An increase in Pakistan's net capital outflow increase the demand of rupees and the rupees depreciate
- D. An increase in Pakistan's net capital outflow increase the supply of rupees and the rupees appreciate
Explanation
An increase in Pakistan’s net capital outflow means residents are purchasing more foreign assets, supplying more rupees in the foreign-exchange market. The resulting excess supply depreciates the rupee.
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