Foreign Exchange, FDI & External Debt (Part

Total Questions: 37

1. Consider the following statements: [I.A.S. (Pre) 2005]

1. During the year 2004, India's foreign exchange reserves did not exceed the 125 billion U.S. Dollar mark.

2. The series of index number of wholesale prices introduced from April, 2000 has the year 1993-94 as base year.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Correct Answer: (b) 2 only

Solution:Foreign exchange reserves of India were at US $129.7 billion as on 10th December, 2004. Hence, statement 1 is incorrect. 1993-94 was the base year of the series of Wholesale Price Index (WPI), which was introduced on 1st April, 2000. Hence, statement 2 is correct. The current base year of WPI is 2011- 12 effective from April, 2017.

2. With reference to the Indian economy, consider the following statements: [I.A.S. (Pre) 2022]

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?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Correct Answer: (c) 1 and 3 only

Solution:The indices of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) are used as indicators of external competitiveness. NEER is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies. An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners. Thus, an in- crease in NEER indicates an appreciation of the rupee. Hence, statement 1 is correct.

Conceptually, the REER, defined as a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries (the weighted average of NEER adjusted by the ratio of domes- tic prices to foreign prices), relates to the purchasing power parity (PPP) hypothesis. Hence, an increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Furthermore, an increase in REER implies that exports be- come more expensive and imports become cheaper; there- fore, an increase in it indicates a loss in trade competitive- ness. Hence, statement 3 is correct, while statement 2 is incorrect.

3. Consider the following statements, the price of any currency in international market is decided by the: [I.A.S. (Pre) 2012]

1. World Bank.

2. demand for goods/services provided by the country concerned.

3, stability of the government of the concerned country.

4. economic potential of the country in question.

Which of the statement(s) given above are correct?

(a) 1, 2, 3 and 4
(b) 2 and 3
(c) 3 and 4
(d) 1 and 4

Correct Answer: (b) 2 and 3

Solution:There is no role of the World Bank in deciding the price of any currency in international market. The price of any currency in international market is decided by the stability of the government of the concerned country and demand for goods/services provided by the country concerned.

4. According to new RBI Governor, which among the following factors determines the exchange value of money? [U.P.P.C.S. (Mains) 2013]

1. High inflation rate

2. High fiscal deficit

3. High crude oil prices

Choose the correct answer from the code below:

Code:

(a) All the three above factors
(b) Only 1 and 2
(c) Only 3
(d) Only 1

Correct Answer: (a) All the three above factors

Solution:According to then RBI's Governor, Raghuram Rajan, these are the following factors that determines the exchange value of money(i) High inflation rate (ii) High fiscal deficit (iii) High crude oil prices.

5. Which one of the following is the correct sequence of decreasing order of the given currencies in terms of their Value in Indian Rupees? [I.A.S. (Pre) 1998]

(a) US dollar, Canadian dollar, New Zealand dollar, Hong Kong dollar
(b) US dollar, New Zealand dollar, Canadian dollar, Hong Kong dollar
(c) US dollar, Hong Kong dollar, New Zealand dollar, Canadian dollar
(d) US dollar, Hong Kong dollar, Canadian dollar, New Zealand dollar

Correct Answer: (a) US dollar, Canadian dollar, New Zealand dollar, Hong Kong dollar

Solution:As per the question period as well as at present, option (a) is the correct answer. Indian Rupee exchange rates with other currencies mention in the question are as follows (as on 14 June, 2024):

Currency	Value in Rupee
1 U.S. Dollar	Rs. 83.54
1 Canadian Dollar	Rs. 60.65
1 New Zealand Dollar	Rs. 51.16
1 Hong Kong Dollar	Rs. 10.69

6. The Indian Rupee, In recent years, has gained strength against which of the following currency? [U.P.P.C.S. (Pre) 2007]

(a) Yen
(b) Euro
(c) Dollar
(d) Pound Sterling

Correct Answer: (c) Dollar

Solution:The exchange rates of Indian rupee in preceding years of the question period were as follows:

Year	U.S. Dollar	Pound Sterling	Euro	Yen
2002-03	48.395	74.819	48.090	0.397
2003-04	45.952	77.729	53.990	0.407
2004-05	44.932	82.864	56.513	0.418
2005-06	44.273	79.047	53.912	0.391

It is clear from the given data, that Indian rupee's condition was fluctuating (sometimes appreciated and sometimes depreciated) against the Euro, the Yen and the Pound Sterling. While, in comparison to US dollar, the Indian rupee's position was continuously appreciated. Hence, option (c) is the correct answer.

7. If the rupees per US Dollar exchange rate changes from Rs. 60 to Rs. 65 in a time period by the market forces, it implies: [Jharkhand P.C.S. (Pre) 2021]

(a) Devaluation of Rupee
(b) Appreciation of Rupee
(c) No change in exchange rate
(d) Depreciation of Rupee

Correct Answer: (d) Depreciation of Rupee

Solution:Changes in the price of foreign exchange under flexible exchange rates (Floating Rate System) are referred to as currency depreciation or appreciation. The market forces determine the price of each currency in this system. When the value of the currency falls in relation with a foreign currency, it is called depreciation, while when there is a rise in currency value in relation with a foreign currency, it is called appreciation. The term devaluation is used when the government reduces the value of a currency under Fixed Rate System. In the given question the domestic currency (rupee) has depreciated since it has become less expensive (its value reduced) in terms of foreign currency. Hence option (d) is the correct answer.

8. The rise in value of one currency relative to another is: [Uttarakhand P.C.S. (Pre) 2021]

(a) a weakening of a currency
(b) a depreciation of a currency
(c) an appreciation of a currency
(d) a debasement of a currency

Correct Answer: (c) an appreciation of a currency

9. When the exchange rate changes from 15 - Rs. 60 to 15-Rs. 58, [Uttarakhand P.C.S. (Pre) 2012]

I. Rupee value has appreciated

II. Dollar value has depreciated

III. Rupee value has depreciated

IV. Dollar value has appreciated

(a) I and II are correct
(b) II and III are correct
(c) I and IV are correct
(d) II and IV are correct

Correct Answer: (a) I and II are correct

Solution:Exchange rate changing from 15-Rs. 60 to 15-Rs. 58 means that rupee value has appreciated in terms of dollar, while dollar value has depreciated in terms of rupee.

10. Which among the following currencies is the costliest? [B.P.S.C. (Pre) 2023]

(a) Euro
(b) Pound Sterling
(c) US Dollar
(d) None of the above

Correct Answer: (b) Pound Sterling

Solution:Among the given currencies Pound Sterling is the costliest. As on 25 June, 2024, value of 1 Pound Sterling is 105.82 Indian Rupees, while values of 1 Euro and 1 US Dollar are 89.38 and 83.43 Indian Rupees, respectively.

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Foreign Exchange, FDI & External Debt (Part – III)