Question: Looking back at Figure, what factors - economic and political - might cause a decrease in the demand for dollars and a downward shift of , assuming constant? Assuming freely floating exchange rates, what effect does the decrease in the demand for dollars have on the exchange rate for rupees? Does it appreciate or depreciate with the decrease in demand for US dollars? What effects would you expect such a change in the exchange rate to have on Sri Lanka's exports? Its imports? Its total national output and total national income? Now consider what factors - again economic and political - might cause the supply of rupees, , to decrease, now assuming remains unchanged? What would happen to the exchange rate value of the rupee? To Sri Lankan exports? Imports? Travel in Sri Lanka? Foreign investment in Sri Lanka?
