Suppose, in a flexible exchange rate system, demand for foreign goods and services increases due to increased international travel by Indians.

Arrange the following statements in correct sequence.

(A) Exchange rate increases.

(B) Exports from India become more affordable for foreigners.

(C) India's income increases by keeping other factors constant.

(D) The demand curve shifts towards the right.

Choose the correct answer from the options given below:

1. (D), (B), (C), (A)
2. (D), (C), (B), (A)
3. (D), (A), (B), (C)
4. (D), (B), (A), (C)

Option 1 -> (D), (B), (C), (A) - Incorrect sequence as exchange rate increase must follow demand shift immediately.

Option 2 -> (D), (C), (B), (A) - Incorrect as income cannot increase before exchange rate changes and exports become affordable.

Option 3 -> (D), (A), (B), (C) - Correct logical sequence of events in forex market.

Option 4 -> (D), (B), (A), (C) - Incorrect as exports cannot become affordable before exchange rate increases.

Hence, Option 3: (D), (A), (B), (C) -> When Indians increase international travel, they demand more foreign currency. This shifts the demand curve for foreign currency to the right (D). As demand increases, the exchange rate rises meaning Indian rupee depreciates (A). When rupee depreciates, Indian goods become cheaper in foreign currency terms, making exports more affordable for foreigners (B). This leads to increased exports which ultimately increases India's national income, keeping other factors constant (C). This is the correct cause-effect sequence in a flexible exchange rate system. -> correct