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    Question

    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?  This question obtained (1) Marks: 
    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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