when the demand for foreign exchange exceeds its supply, the value of the domestic currency

Answer Details

When the demand for foreign exchange exceeds its supply, the value of the domestic currency depreciates. Foreign exchange refers to the currency of other countries that is exchanged for domestic currency. When the demand for foreign exchange is greater than its supply, it means that there are more people who want to buy foreign currency than those who want to sell it. As a result, the price of foreign currency in terms of domestic currency increases. The increase in the price of foreign currency means that each unit of domestic currency can purchase less foreign currency. In other words, the value of the domestic currency has decreased. Therefore, when the demand for foreign exchange exceeds its supply, the value of the domestic currency depreciates.