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Arrange the following statements in correct order in the context of flexible exchange rate system.

(A) When income increases, consumer spending increases.

(B) Shift in demand curve for foreign exchange towards right.

(C) Spending on imported goods increases.

(D) Depreciation of domestic currency with respect to foreign currency.

Choose the correct answer from the options given below:

Solution

✅ Correct Option: 2

When income increases, consumer spending increases (A). Part of this increased spending falls on imported goods (C), which raises the demand for foreign exchange, shifting the demand curve for foreign exchange rightward (B). With supply unchanged, the exchange rate rises, i.e., the domestic currency depreciates against the foreign currency (D). Correct sequence: (A), (C), (B), (D).

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