Consider the following statements 1 India is having managed floating exchange rate system 2 An ...........

Economic Affairs Money Supply and Monetary Policy

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Consider the following statements

1. India is having managed floating exchange rate system.

2. An increase in Nominal Effective Exchange Rate (NEER) indicates depreciation of local currency.

3. An increase in Real Effective Exchange Rate (REER) implies that export becomes more expensive.

How many of the statements given above are correct?

Only One

Only Two

All Three

None

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Explanation:

1 and 3

"India is having a managed floating exchange rate system." - This statement is correct. India operates under a managed floating exchange rate system, where the exchange rate is primarily determined by market forces, but the central bank (Reserve Bank of India) may intervene to stabilize or influence the exchange rate.

"An increase in Nominal Effective Exchange Rate (NEER) indicates depreciation of the local currency." - This statement is incorrect. An increase in the Nominal Effective Exchange Rate (NEER) usually indicates an appreciation of the local currency, not depreciation. NEER is a measure of the value of a currency against a basket of other currencies.

"An increase in Real Effective Exchange Rate (REER) implies that exports become more expensive." - This statement is correct. An increase in the Real Effective Exchange Rate (REER) suggests that the local currency has appreciated on a real basis, considering inflation differentials. This can make exports more expensive and imports cheaper.

Therefore, the correct answer is 3, "1 and 3."

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