Statement 1 is correct. A decrease in the expected future exchange rate has opposite effects on the supply and demand for a currency, decreasing demand for the currency and increasing its supply on the foreign exchange market. Statement 2 is incorrect. The idea that exchange rates will adjust to reflect the difference in inflation rates between different countries is purchasing power parity (PPP).

If a country’s exports are increasing at a faster rate than its imports it means that its exports are being purchased by foreigners at a faster rate than imports from abroad are being purchased by domestic consumers. In order for foreigners to buy a country’s exports they must first buy the exporting country’s currency causing it to appreciate. An increase in the domestic rate of inflation and real interest rates in other countries will each lead to depreciation of a country’s domestic currency on the foreign exchange market.