Question

“The value of the rupee has fallen nearly 14 percent … against the dollar, since the...

“The value of the rupee has fallen nearly 14 percent … against the dollar, since the end of August …, [it] has been falling sharply since June….”

Show what this would look like on an appropriately labeled graph in which the dollar is the commodity priced in Rupees (use an R for rupees). Give one example of a situation that could cause the rupee (or any currency) to fall.

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Answer #1

When the Rupee depreciates against the Dollar the demand for dollar increases and that shifts the demand curve to the right. In the graph below the demand for the Dollar increased that decreased the value of rupee form INR1 per dollar to INR1.14 per dollar. The initial equilibrium was at point "a" the new equilibrium will be at point "b".

An increase in the interest rates in the US will lead to a demand for the Dollar to increase. The investor will rush to the US market for greater return. It will depreciate the value of other currency including the rupee because their demand is less compared to the dollar.

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