Suppose exchange rate rises from $ 1 = INR 60 to $ 1 = INR 75,
(a) What will be the impact of this on the price of import and export?(1)
(b) How the imports of essential goods will be effected? What will be the effect of this on the BOT? (2)
(c) How RBI can help in bringing down the high exchange rate? (2)
(d) Identify the foreign exchange rate system
Please explain the answer of part (d) in detail and depth
Dear student,
a) As the exchange rate has risen this suggests that the price of foreign currency has increased. This implies that the imports have become costlier while the exports have become cheaper.
b) As the imports are of the essential goods their quantity cannot be decreased despite the rise in prices of imports.In such a scenario if the outflow of foreign exchange for the imports is more than the inflow of foreign exchange for exports then the BOT would worsen and vice-versa.
c) In such a situation the RBI can intervene to bring down the high exchange rate the RBI would sell foreign currency for rupees.
d) The system of exchange rate that is described is managed floating exchange rate.
a) As the exchange rate has risen this suggests that the price of foreign currency has increased. This implies that the imports have become costlier while the exports have become cheaper.
b) As the imports are of the essential goods their quantity cannot be decreased despite the rise in prices of imports.In such a scenario if the outflow of foreign exchange for the imports is more than the inflow of foreign exchange for exports then the BOT would worsen and vice-versa.
c) In such a situation the RBI can intervene to bring down the high exchange rate the RBI would sell foreign currency for rupees.
d) The system of exchange rate that is described is managed floating exchange rate.