UPSC Prelims 2022 – Question 2

Here is Question No. 2 a part of our series on UPSC Prelims 2022.

Q2. With reference to the Indian economy, consider the following statements:

1. An increase in the Nominal Effective Exchange Rate (NEER) indicates the appreciation of the 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 is correct?

a) 1 and 2 only

b) 2 and 3 only

c) 1 and 3 only

d) 1, 2 and 3

Answer – C

• Statement 1 is correct: Nominal Effective Exchange Rate (NEER) is a measure of the value of a currency against a weighted average of several foreign currencies. The nominal exchange rate is the amount of domestic currency needed to purchase foreign currency. If a domestic currency increases against a basket of other currencies inside a floating exchange rate regime, NEER is said to appreciate. If the domestic currency falls against the basket, the NEER depreciates. An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners

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