Foreign Exchange Rate

Introduction According to Crowther “the rate of exchange measures number of units of one currency which is exchanged in the foreign exchange market for one unit of another”. The various types of exchange rate system are: Fixed Exchange Rate system (includes Gold Standard System of Exchange Rate, Bretton Wood System of Exchange Rate, Special Drawing Rights, Currency Board System, European Monetary Union) Flexible Exchange Rate system (includes Nominal Exchange Rate and Real Exchange Rate) and Other Exchange Rate systems (includes Spot Rate, Forward Rate, Multiple Rates, Two–tier Rate System, Nominal Effective Exchange Rate (NEER), Real Effective Exchange Rate (REER), Real Exchange Rate (RER), Crawling Peg and Managed Float Rate) The merits of fixed exchange rate are: it is useful in macroeconomic policies, increases international trade and maintains stability. The demerits of fixed exchange rate include rigidity in resource allocation discourage venture capital, etc. The merits of flexible exchange rate are: foreign exchange can be used as venture capital, it allows international capital movement, etc. The demerits of flexible exchange rate are; it creates instability in international trade, under this system macroeconomic policy becomes redundant, etc. Foreign exchange market is the market in which participants buy, sell, exchange and speculate on currencies. This can be of two types (Spot Market and Forward Market). Exchange rate under flexible exchange rate system is determined by the forces of supply and demand of currency in the foreign exchange market. The factors affecting foreign exchange are: Government Intervention Speculation Interest Rate and Income

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  • Q1

    A decrease in the value of country’s currency in terms of foreign currency in flexible exchange rate system is known as

    Marks:1
    Answer:

    depreciation of currency.

    Explanation:
    Depreciation of a currency is the decrease in the value of country’s currency in terms of foreign currency. It indicates that domestic currency is less valuable than before. Depreciation takes place under flexible exchange rate system.
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  • Q2

    A decrease in the value of country’s currency in terms of foreign currency in fixed exchange rate system is known as

    Marks:1
    Answer:

    devaluation of currency.

    Explanation:
    When a country brings down the value of its currency in terms of foreign currency by a government order under the fixed exchange rate system, it is called devaluation of currency.
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  • Q3

    An increase in the value of a country’s currency in terms of a foreign currency in fixed exchange rate system is known as

    Marks:1
    Answer:

    revaluation of currency.

    Explanation:
    When a country raises the value of its currency in terms of foreign currency under fixed exchange rate system, it is called revaluation of currency. This is done by the government of the country.
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  • Q4

    An increase in the value of a country’s currency in terms of a foreign currency in flexible exchange rate system is known as

    Marks:1
    Answer:

    appreciation of currency.

    Explanation:
    Appreciation of a currency is the increase in the value of a country’s currency in terms of a foreign currency in flexible exchange rate system. It indicates that domestic currency is more valuable than before.
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  • Q5

    Foreign exchange is used to make

    Marks:1
    Answer:

    international payments.

    Explanation:

    Currency which is used for making international payments is called foreign exchange. For India, American dollar, British pound, Japanese yen, etc. comprise foreign exchange.

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