Question
Consider the following statements: 1. The idea
of Tobin Tax was to end the speculation and volatility in the stock prices of the secondary market. 2. Scarcity of dollars in the Indian market are favorable for the exporters and not for the importers. 3. Nominal Exchange rate considers the purchasing power of the country and excludes the effects of Inflation. Which of the statements given above is/are incorrect?Solution
● Statement 1 is incorrect: The currency exchange transactions may cause volatility in the exchange rates due to speculative trading leading to appreciation or depreciation in the value of a currency as the case may be. Currency exchange transactions done by the authorized currency dealers are subjected to GST. Tobin tax was suggested to avoid speculation and volatility in the currency exchange market. It does not deal with the volatility in the stock market. ● Statement 2 is correct: Scarcity of Dollar in Indian market in relation to its demands leads to appreciation in the price of dollar and depreciation in the Indian rupee with respect to dollars. This situation is not favorable for the importers as for goods worth 1 dollar, more rupees are to be spent. However, this benefits the exporters, as their goods appear cheaper in the international market. ● Statement 3 is incorrect: Nominal Exchange rate refers to the price of a currency of a country with respect to Dollar. It is not adjusted for the effects of inflation and the purchasing power of the country.
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