With reference to the Indian economy, consider the following statements : 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in t

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Q: 2 (IAS/2022)
With reference to the Indian economy, consider the following statements :
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct ?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,355,482,119,228,355,135

keywords: 

{'nominal effective exchange rate': [0, 0, 0, 1], 'real effective exchange rate': [0, 0, 0, 1], 'domestic inflation': [0, 0, 0, 1], 'indian economy': [0, 3, 3, 5], 'inflation': [0, 1, 0, 3], 'neer': [0, 0, 0, 1], 'reer': [0, 0, 0, 1], 'trade competitiveness': [0, 0, 0, 1], 'rupee': [1, 0, 1, 0], 'increase': [3, 1, 10, 35], 'trend': [0, 2, 1, 2], 'improvement': [1, 1, 0, 4]}

Statements 1 and 3 are correct, while statement 2 is incorrect.

  1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee: This statement is correct. NEER is a measure of the value of a currency relative to a basket of other currencies weighted by their share in trade. An increase in NEER means that the value of the rupee has appreciated against the currencies in the basket.

  2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness: This statement is incorrect. REER is a measure of the value of a currency adjusted for differences in inflation rates between countries. An increase in REER means that the value of the currency has appreciated in real terms, which can make exports more expensive and imports cheaper, potentially reducing trade competitiveness.

  3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER: This statement is correct. If inflation in India is higher than inflation in other countries, it will lead to a decrease in the real value of the rupee (REER). At the same time, a higher inflation rate can lead to an increase in the nominal value of the rupee (NEER) to maintain the competitiveness of exports. This can result in a divergence between the NEER and REER.

Therefore, the correct answer is: Statements 1 and 3 are correct, while statement 2 is incorrect.

 

Preparing for Future Exams: Learning from the Analysis of Past Questions

Topics:

  • Nominal Effective Exchange Rate (NEER)
  • Real Effective Exchange Rate (REER)
  • Indian economy
  • Inflation

Sources:

  • "Foreign Exchange Market" chapter in the NCERT Economics textbook for Class XII: This chapter provides an overview of the foreign exchange market, exchange rate determination, and exchange rate regimes.
  • Reserve Bank of India (RBI) website: The RBI website provides data and analysis related to exchange rates and the Indian economy.
  • "International Finance" by Maurice D. Levi: This book provides a comprehensive overview of international finance, including exchange rates and their determinants.

Related topics:

  • Balance of payments
  • Trade competitiveness
  • Exchange rate regimes
  • Macroeconomic policies and their impact on the economy.