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    Question

    This question obtained (1) Marks: 

    Suppose that the exchange rate of the Indian rupee

    appreciates by 10 per cent relative to the currencies of India’s trading partners. Over the same period, inflation in India is 8 percent compared to 3 percent inflation in the trading partners. What is the change in India’s real exchange rate? 
    A 5 percent appreciation Correct Answer Incorrect Answer
    B 10 percent appreciation Correct Answer Incorrect Answer
    C 15 percent appreciation Correct Answer Incorrect Answer
    D 5 percent appreciation Correct Answer Incorrect Answer
    E 20 percent appreciation Correct Answer Incorrect Answer

    Solution

    India’s real exchange rate will appreciate by 15%. Excess of inflation in India as compared to other trading partners = (8−3) =5%. Appreciation in exchange rate of Indian rupee relative to the currencies of trading partners =10% ∴ Appreciation in India’s real exchange rate =10+5=15%.

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