Foreign Exchange Rate

1 Mark Questions

1. Give the meaning of managed floating exchange rate. (All India 2014; Delhi 2012)

Ans. The system of adjusting the exchange rates as per the rules and regulations of foreign exchange market is termed as managed floating.

2. Define foreign exchange rate. (All India 2014:1 Delhi 2011)

Ans. Foreign exchange rate refers to the rate at which one currency can be exchanged for the other currency in foreign exchange market, e.g. if Rs. 58 is paid to buy one US dollar, then Rs./$ exchange rate will be 58 i.e. Rs.58 per dollar.

3. What is floating exchange rate? (All India 2014)

or Define flexible exchange rate system. (Delhi 2008)

Ans. The rate of exchange which is determined by the market forces of demand and supply of foreign currencies in the foreign exchange market, is termed as flexible exchange rate system.

4. What is a fixed exchange rate? (Ail India 2013)

or Give the meaning of fixed foreign exchange rate.(All India 2012,2009,2008; Delhi 2009)

Ans. Fixed exchange rate is the system under which the central authority or government maintains their exchange rate fixed either against gold or some other foreign currency, (say USD)

1. What is foreign exchange? (All India 2011; Delhi 2009c) or Give meaning of foreign exchange. (Delhi 2009c)

Ans. Foreign exchange refers to the reserve of foreign currency with a country, e.g. currency of US and UK are the foreign exchanges for India.

1. State two sources of supply of foreign exchange. (Delhi 2010)

Ans. Two sources of supply of foreign exchange are:

1. Export of goods and services from domestic country to foreign country.
2. Foreign direct investment.

1. State two sources of demand for foreign exchange. (All India 2010)

Ans. Two sources of demand for foreign exchange are

1. Payment of loans and interest to international organisations.

1. Gifts and grants to rest of the world.

3 Mark Questions

1. How does giving incentives for exports influence foreign exchange rate?

Explain (Delhi 2014)

Ans. The incentives for exports boosts exports for the country. As a result of increase in exports the supply of foreign currency in the country increases. With demand remaining the same, this results in a fall in the exchange rate implying currency appreciation.

Exchange rate S' <math>Q_1</math> Quantity of foreign exchange

1. Recently Government of India has doubled the import duty on gold. What

impact is it likely to have on foreign exchange rate and how? (Delhi 2014)

Ans. When government increase the import duty of gold, the import of gold will fall. This reduces the demand for foreign currency. With the supply of foreign currency remaining same, the foreign exchange rate would fall. This implies appreciation of rupees. R Exchange rate R' D D - X 0 <math>Q_1</math> Quantity of foreign exchange

1. Visits of foreign countries for sightseeing etc. by the people of India is on the

rise. What will be its likely impact on foreign exchange rate and how? (Delhi 2014)

Ans. When there is a rise in the visit of foreign countries by the people in India, the demand for foreign currency increases. With the supply of foreign currency remaining