UPSC CSE Prelims
Question 20
With reference to the Indian economy, consider the following statements :
- An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
- An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
- 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 are correct ?
View correct answer and explanation
Correct answer: C
Correct Option: C (1 and 3 only)
Explanation: Higher NEER means nominal rupee appreciation, and relatively high Indian inflation widens differences between nominal and real effective exchange-rate measures.
Statement / Pair / Item-wise Analysis:
1. True / qualifies - An increase in the rupee’s NEER indicates appreciation against a trade-weighted currency basket.
2. False / does not qualify - An increase in REER generally denotes real appreciation, which makes domestic exports less price-competitive, other things equal.
3. True / qualifies - Inflation differentials affect the price-adjusted REER but not NEER in the same way.
Option-wise Analysis:
A. Incorrect-includes 2 even though An increase in REER generally denotes real appreciation, which makes domestic exports less price-competitive, other things equal.; omits 3 even though Inflation differentials affect the price-adjusted REER but not NEER in the same way.
B. Incorrect-includes 2 even though An increase in REER generally denotes real appreciation, which makes domestic exports less price-competitive, other things equal.; omits 1 even though An increase in the rupee’s NEER indicates appreciation against a trade-weighted currency basket.
C. Correct-selects exactly the correct statements/items identified above.
D. Incorrect-includes 2 even though An increase in REER generally denotes real appreciation, which makes domestic exports less price-competitive, other things equal.