Import Demand Depreciates Currency

Steps:

• Exchange rate fall means domestic currency depreciates (more domestic units per foreign unit).
• Depreciation happens when supply of domestic currency rises in foreign exchange market.
• Higher import demand requires buying more foreign goods, increasing domestic currency supply to obtain foreign currency.
• This excess supply lowers the currency's value.

Why A is correct:

• Per balance of payments, rising imports boosts demand for foreign currency, increasing domestic currency supply and causing depreciation via supply-demand equilibrium.

Why the others are wrong:

• B: Higher domestic interest rates attract foreign capital inflows, increasing demand for domestic currency and causing appreciation.
• C: Increased domestic savings reduces borrowing needs abroad, lowering domestic currency supply and supporting appreciation.
• D: More tourists bring foreign currency inflows, raising demand for domestic currency and causing appreciation.

Final answer: A